Daiwa Securities Group said it would pay about $2.2 billion to buy out Sumitomo Mitsui Financial Group from their investment banking joint venture, leaving Daiwa vulnerable amid intensifying competition for deals in Japan.
Daiwa, Japan's second-largest brokerage, said it would likely pay about 200 billion yen ($2.2 billion) to buy SMFG's 40 percent stake in their 10-year old venture, Daiwa Securities SMBC, making it a wholly owned subsidiary.
The deal was widely expected after reports by Thomson Reuters and other media last week.
The fate of the partnership had been in doubt since SMFG agreed earlier this year to buy Citigroup's brokerage and securities underwriting operations in Japan for about $6 billion, some of which overlapped with the Daiwa venture.
SMFG had been in talks with Daiwa to take a majority stake in the venture with the aim of then merging its operations with the wholesale businesses bought from Citigroup, but Daiwa resisted losing control and the negotiations fell apart.
Daiwa Securities CEO Shigeharu Suzuki told a new conference the impact on earnings of cutting ties with SMFG would be limited.
We were doing business alone until 11 years ago, before we made the tie-up, and it was Daiwa Securities that was leading this venture, Suzuki said.
So I'm sure we will do well in our business in the future. I'm confident about it.
Daiwa is the main relationship broker for 800 companies, while SMFG has over 200, Suzuki said.
In that sense we will be able to achieve what we have done in the future with our expertise, he said.
Daiwa's decision to cut its ties with SMFG has raised concerns among investors about whether the broker will lose sales. Daiwa had frequently touted its alliance with SMFG as key to winning mandates for investment banking deals.
Analysts predict Daiwa's revenues from investment banking will likely fall sharply without the SMFG tie-up. Daiwa's stock slid 6 percent on Friday when media reports of the deal first surfaced, though it has since regained some of that ground.
If Daiwa, which has not been aggressive in restructuring, hammers out solid steps to strengthen its earnings structure, the excess pessimism in the stock market about the company's earnings outlook will go away, said Credit Suisse analyst Azuma Ohno.
Suzuki said he had no plans at present to seek another partner, even as its rivals make acquisitions and forge ties to strengthen their positions in the market.
Nomura Holdings Inc, Japan's biggest broker, last year acquired the Asia, Europe and Middle East operations of Lehman Brothers, while Mitsubishi UFJ Financial Group plans to merge its investment banking business in Japan with that of Morgan Stanley.
Credit rating agencies have also raised concern about the potential risk of Daiwa losing ties with SMFG.
Moody's Investors Service, which this week cut ratings for Daiwa Securities Group and Daiwa SMBC, said it may downgrade Daiwa SMBC's rating further because its strategic importance to the Sumitomo Mitsui Banking Corp may decline substantially in view of SMFG's plans to buy Nikko Cordial.
Japan Credit Rating Agency also said on Thursday the cancellation of the joint venture would have a negative impact on earnings of Daiwa Securities and Daiwa SMBC.
(Additional reporting by Yumiko Nishitani; Editing by Michael Watson)