Nomura announces capital-raising plan

Japan's top brokerage house announces an international equity offering that could raise up to $3 billion, the equivalent of one-third of its market cap.

Hurt by a slump in its traditional brokerage business, losses on subprime-related investments, and the high costs associated with the integration of Lehman Brothers, Nomura Holdings announced Monday that it will launch an international offering of up to 750 million new shares. The price will be announced between March 9 and March 11. As obliged under Japanese law, the company provided an estimate of how much it might raise, namely ¥302 billion (3.1 billion), based on the company's closing price on February 19, minus costs and commissions.

According to data provider Dealogic, the deal will be the biggest equity capital markets offering from Japan so far this year, and is the fifth largest follow-on offering in Japan's bank sector on record. It is also the third largest share sale globally year-to-date, behind HBOS's $13 billion issue and Lloyds TSB's $6.7 billion offering.

Sources close to the deal say Nomura Securities is the global co-ordinator, while Nomura Securities and Nomura International will act as lead managers. The domestic underwriters will consist of Nomura Securities and Mitsubishi UFJ Securities. However, the international underwriters have not yet been determined.

The share offering breaks down as 341.4 million new shares to be sold domestically, with an over-allotment option of 33.6 million shares; and 310.8 million new shares to be sold to international investors with a purchase option by the underwriters for a further 64.2 million shares. The total will therefore be 750 million new shares, which will be added to the bank's existing 1.965 billion shares. According to a press release distributed Monday, the proceeds from the capital raising will be used to "make investments (including loans) in the company's consolidated subsidiaries in each region to strengthen the company's business foundation in Asia (including Japan) and Europe. The consolidated subsidiaries expect to use the investment money as working capital."

One banker points out that the capital being raised is large relative to Nomura's current market capitalisation on the Tokyo Stock Exchange. Nomura's market cap has shrunk from ¥5 trillion at its peak in March 2006 and ¥2.8 trillion in March 2008 to just under ¥1 trillion today. In other words, Nomura is seeking to raise the equivalent of 30% of its market cap.

The company's shares closed at ¥463 on Monday, but could sink further on Tuesday given the dilution involved and since Monday's announcement was made after trading hours. As recently as June 6 last year, the shares were trading at a 52-week high of ¥1,918. The shares reached at 52-week low of ¥426 on February 18.

The bank has made some substantial losses in recent months. In the nine months ending December 2008, Nomura Holdings announced a consolidated 65% decline in total revenue compared to December 2007, and a 72% decline in net revenue. Net losses for the period came to ¥492 billion, compared to an ¥86 billion gain for the corresponding period in 2007.

The banker says that Nomura is shrinking to the stage where it would be a possible takeover target for an ambitious foreign bank. "Citi made a successful acquisition of (retail brokerage) Nikko Cordial early last year, and obtained some great business out of Nikko Cordial. A foreign company with a strong balance sheet like J.P. Morgan might be interested in taking a look at Nomura," he says. Ironically, however, the banker estimates that the recent acquisition by Nomura of Lehman Brothers' Asian and European operations makes Nomura less attractive to a foreign bank, since they would already have operations in those areas. In addition, nobody knows if the Lehman bankers will remain at Nomura once their guaranteed bonuses expire in two years' time.

Nomura's strategy of internationalisation may be beginning to bear fruit, however. According to Dealogic, Nomura is top of the mergers and acquisitions arrangers table for Asia ex-Japan so far this year, having advised on eight deals worth $18 billon -- ahead of J.P. Morgan and Morgan Stanley. The company is not ranked in the top 10 for either equity or debt over the same period. Still, its acquisition of overseas banking expertise is gradually being felt. 

One bank in Japan that is moving to a genuinely international platform is Mitsubishi UFJ Financial Group (MUFG), which has announced plans to merge its domestic securities operations with Morgan Stanley's local securities operations.

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