Jefferies Agrees ‘Strategic Alliance’ With Japan’s SMFG

Jefferies Financial Group Inc. has agreed a “strategic alliance” with Sumitomo Mitsui Financial Group Inc., a deal that will see the Japanese company provide a credit line to the Wall Street firm’s leveraged finance operations and see the lenders join forces on certain pieces of investment banking business.

The second-largest Japanese bank will also buy shares from the market to build up to a 4.9% holding in the New York-based firm, the Japanese lender said in a statement Wednesday. That reflects an equity investment of up to $386 million based on the closing stock price of Jefferies on July 13.

Under the tie up, Jefferies and Sumitomo Mitsui will collaborate on corporate and investment banking activities such as cross-border dealmaking involving Japanese companies, U.S. sub-investment grade corporate business and opportunities in the U.S. health care sector.

The Japanese firm will also provide financing to Jefferies Finance LLC, the leveraged finance underwriting unit, according to a separate joint statement Wednesday.

“This partnership will allow us to enhance our global footprint and allow our clients to benefit from SMBC’s significant expertise, relationships and resources,” Chief Executive Officer Richard Handler said by email.

Jefferies shares were up 8.5% at 9:54 a.m. in New York.

Longstanding Ties

“We have enjoyed a warm and increasingly close operating relationship with Sumitomo Mitsui going back over a decade, including active counterparty relationships in funding and particularly in our equity trading operations in Tokyo and New York,” Brian Friedman, Jefferies president, said in an interview. The credit line to Jefferies Finance “will help us grow our market share.”

Lockdown restrictions meant the transaction was negotiated in part remotely with Tokyo as well as with New York-based representatives of the Japanese lender, he said.

The two firms expect to benefit from the U.S. bank’s expertise advising mid-sized U.S. companies, according to Friedman.

“An advantage that we and SMBC have is Jefferies’ leadership in middle-market M&A where we think the opportunity is more likely to develop in cross-border activity,” he said.

Retail Brokerage

Sumitomo Mitsui has a strong retail brokerage business in Japan, but “it lacks the overseas institutional securities strength of its megabank rivals, so Jefferies could help it increase exposure to U.S. investment banking,” said Michael Makdad, a Morningstar Inc. analyst in Tokyo. It’s a “better option” for SMFG than trying to expand its U.S. investment-banking business from scratch, he said.

Weak domestic growth prospects have pushed Sumitomo Mitsui to allocate more resources outside Japan in recent years. The lender this month said it’s taking a stake in Fullerton India Credit Co. for about $2 billion and in April agreed to buy a 49% position in Vietnamese consumer lender FE Credit.

In an interview in December, Sumitomo Mitsui Chief Executive Officer Jun Ohta said the bank wanted to find a partner to underwrite equity and bond sales in the U.S. and elsewhere, after the lender was unable to fully take advantage of a corporate financing boom last year.

Wall Street already has an existing blueprint for such a strategy. Larger rival Mitsubishi UFJ Financial Group Inc. bought a $9 billion stake in Morgan Stanley during the global financial crisis in 2008. The tie-up has seen the two firms collaborate on business including M&A advice.

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