Sumitomo Mitsui Financial: Purchase of 15% Nonvoting Stake in Jefferies Looks Strategically Sound

We maintain our JPY 6,050 fair value estimate for Sumitomo Mitsui Financial Group 8316, representing 8% upside from the current share price, after the group announced plans to increase its stake in U.S. investment bank Jefferies to 15% from 4.5% as part of an expanded collaboration between the two firms. SMFG bought 4.5% of Jefferies’ common shares through open-market purchases in 2021 when the initial collaboration was announced and provided $2.25 billion in financing to Jefferies at that time using the Japanese bank’s balance sheet.

Jefferies now plans to create a new class of nonvoting common shares so that SMFG, after purchasing additional shares of Jefferies in the market, can exchange its regular common shares for nonvoting preferred shares that will be mandatorily convertible into the new nonvoting common shares. After conversion, SMFG will hold an economic interest in Jefferies of up to 15% and receive the same dividends as holders of Jefferies’ voting common shares, having provided a total financial commitment to Jefferies of around $3.4 billion. Although SMFG will not have voting rights, it will be entitled to a seat on Jefferies’ board when its economic interest crosses 10%.

In the two years since SMFG and Jefferies began their alliance, they have collaborated in areas such as cross-border M&A, healthcare, and leveraged finance. The two firms said they will now broaden the scope of the M&A advisory collaboration and jointly cover certain investment-grade clients that have banking relationships with SMFG and that will now have dedicated Jefferies investment banking coverage. Further, they will increase cooperation across capital markets businesses, with SMFG responsible for credit products and debt capital markets and Jefferies responsible for M&A and equity capital markets.