In a deal tipped by AsianInvestor, Nikko Asset Management has agreed to acquire DBS Asset Management. DBS will acquire a 7.25% stake in Nikko AM in return, in an all-share agreement.

Nikko AM is privately held but intends to list in Japan sometime in 2011, with Sumitomo Trust & Banking mandated as the underwriter.

The deal delivers DBS Asset Management, as well as its 30% stake in HwangDBS Investment Management in Malaysia; a 51% stake in Asian Islamic Investment Management, also in Malaysia (the other 49% being owned by HwangDBS); and DBS AM’s Hong Kong funds subsidiary.

Although DBS AM’s public AUM is around $21 billion, about two-thirds of this is attributed to a 33% stake in Changsheng Fund Management in China, which is not part of the deal. The size of assets actually being transferred to Nikko AM is closer to $7 billion.

The Changsheng stake will transfer to DBS Bank. Nikko AM already has a 40% stake in Rongtong Fund Management, a much bigger business (it’s the sixth-largest Sino-foreign funds JV). Mainland law doesn’t allow foreigners to own multiple asset-management businesses.

The deal has a strategic component as well: DBS Bank will distribute Nikko AM products through its regional branch network, which includes Singapore, Hong Kong and Taiwan.

Moreover, it delivers a Hong Kong type-9 securities investment licence to Nikko AM, which had lacked this, and had held off from applying because it expected DBS AM to deliver this prize.

Deborah Ho, who is the current CEO at DBS AM, will remain with the combined business, effectively as Singapore head. She is also expected to play a major role in the combined firm’s Malaysian business, and will join Nikko AM’s executive committee in Tokyo.

Although the main DBS AM business will adopt the Nikko name, no decision has been made regarding the subsidiary JVs. Their brands will have to be negotiated with the other shareholders.

For DBS, the sale allows it to move a capital-intensive business off its balance sheet in preparation for meeting the Basel III international banking accord, while allowing it to retain upside via the stake, says a banker involved in the deal. Citi advised DBS and Goldman Sachs advised Nikko AM.

Blair Pickerell, Nikko AM’s head of Asia, says this transaction along with last month’s acquisition of Tyndall Investments, an Australian and New Zealand firm, bring Nikko’s combined AUM to over $150 billion (from $120 billion).

It also opens new distribution opportunities via DBS Bank and Tyndall’s former parent, Suncorp-Metway, an Australian financial services company.

Pickerell says Nikko hopes to have both deals closed within three months.