Travelers buys £1.1bn stake in Nikko Securities

The US financial giant Travelers Group yesterday announced a major venture with Nikko Securities buying a stake worth 220 billion yen (£1.1 billion) in the business, the third-biggest Japanese brokerage.

Travelers is to acquire a total 25 per cent of Nikko by taking 9.5 per cent in common stock and 15.5 per cent in convertible bonds, and the two firms are to set up a joint securities firm here, the pair said in a statement.

In turn, Nikko Securities would accept one Travelers director on its board and take a direct stake in the US giant worth 10-15 billion yen, officials said.

The new firm, Nikko Salomon Smith Barney, will combine the Japanese unit of Salomon Smith Barney, the brokerage arm of Travelers, with Nikko's wholesale division. Nikko will hold 51 per cent of the new firm.

"When you marry companies that have been among the leaders in two of the biggest economies in the world I think you are putting together something that will be really exciting," said Travelers chairman Mr Sanford Weill.

"We think that our creating a partnership with Nikko will allow us to be more productive not only in this market place but all around the world," he said.

News of the stategic partnership was greeted by New York-based ratings agency Moody's Investors Service with an upgrade of Nikko's outlook from negative to positive. Nikko's senior debt is currently rated by Moody at Baa1.

Moody's said the deal "will benefit Nikko by combining its substantial domestic distribution capability together with the experience, products and tools needed to compete in a competitive deregulated marketplace".

The two companies said their joint venture would offer securities trading and derivative underwriting, and research services.

Nikko would transfer its customer product operations, investment banking, headquarters and most of the operations of the Nikko Research Institute to the operation, they said.

Salomon Smith Barney would hand over its Japan operations, excluding its dealing division, to the joint venture, due to start operations in January next year with initial capital of 140 billion yen.

The reciprocal share purchases were expected to be concluded by the end of August.

"It is a great move by Nikko," said Mr James Fiorillo, senior analyst at ING Barings. "Tying up with Travelers, a well-regarded product name, is a strategic step."

Mr Paul Heaton, senior associate director at Deutsche Morgan Grenfell, said the marriage was "a reflection of American brokers doing very well and looking to expand international operations".

"It is another part of the worldwide jigsaw puzzle. Stock prices have fallen, the yen has weakened. Brokers in Japan are now very cheap for American firms," Mr Heaton added. In the past three years the yen has lost more than 40 percent of its value against the dollar.

Nikko watched its stock price soar after details of the tie-up leaked out. It closed yesterday up 10.6 per cent, after climbing 4.8 per cent on Friday.