Sumitomo's $29bn Bid Hots Up Fight

The unprecedented takeover battle playing out in the Japanese banking sector intensified yesterday when Sumitomo Mitsui Financial Group offered $29bn (£16bn) in an attempt to snatch smaller rival UFJ Holdings from an agreed deal with Mitsubishi Tokyo Financial Group.

The stakes in the bidding contest are extremely high, with the winner becoming the biggest banking group in the world, surpassing the New York-based Citigroup.

UFJ, Japan's fourth largest bank, announced a plan to merge with Mitsubishi, the third largest, on July 16.

Two weeks later Sumitomo, the second largest banking group in Japan, expressed its interest in merging with UFJ, breaking new ground in a nation where previous mergers in the industry have been directed by government or agreed in step with others in the sector. The banking regulator has already said it has no intention of intervening in the process.

The battle is being viewed as a sign that years of reform in the Japanese banking sector are beginning to take hold.

The Sumitomo share offer was a 23% premium to the UFJ closing price on Friday. Mitsubishi has not yet said how much it is willing to put on the table and is still conducting due diligence. Sumitomo is also offering to inject $6.3bn in cash to accelerate UFJ's write-off of bad loans.

"It's a pretty aggressive bid," said Barclays Capital analyst Jason Rogers.

In a statement UFJ, which signed an agreement with Mitsubishi two weeks ago, said it had not altered its plans but that it would "carefully consider" Sumitomo's offer.

A merger between Mitsubishi and UFJ would create a company with assets of $1.7 trillion, while a deal between Sumitomo and UFJ would result in a business with assets of $1.6 trillion. Citigroup has assets of $1.3 trillion.

The sector has struggled for a decade to clear accumulated bad debts and is seeking to reduce dependence on corporate lending and create new revenue streams. The interest shown by Sumitomo and Mitsubishi shows a renewed confidence in the industry.

While the other three top banks in Japan are now profitable, UFJ last year lost $3.6bn. It has bad loans of $42bn and a government audit recently found it had allegedly shredded documents and forged minutes to conceal its problem loans.

According to reports, Sumitomo is hoping to tempt UFJ into a friendly deal but has not ruled out taking the bid hostile. Around 30% of UFJ's shareholders are outside Japan and could be receptive to a hostile offer if it were significantly higher.

A Mitsubishi spokesman declined to comment on the timing of the bank's response. "We will continue pushing forward with due diligence to merger with UFJ," he said. The bank said its valuation would not be affected by the Sumitomo offer.

UFG has an extensive branch network in Japan and top corporate clients including the Toyota Motor Corporation.