Source

Share

Posted by

Steve Walker
Business Analyst / PM - Associate, Goldman Sachs,
New York, NY

Premium Contributor
STREET Cred - 2,114

By MICHAEL J. DE LA MERCED

Morgan Stanley and Citigroup agreed on Tuesday to value their brokerage joint venture, Morgan Stanley Smith Barney, at $13.5 billion, allowing Morgan Stanley to buy full control of the business at a favorable valuation.

That will set the price for which Morgan Stanley will buy an additional 14 percent stake in the business, raising its stake in the brokerage to 65 percent. It will buy a 15 percent stake from Citigroup by next June, with the goal of buying the entire operation by 2015.

The two firms agreed to the valuation of the brokerage on Monday afternoon, after the investment bank Perella Weinberg Partners submitted its own appraisal of Morgan Stanley Smith Barney’s worth, according to people briefed on the matter. The value submitted by Perella Weinberg was lower than $13.5 billion, one of these people said.

The appraiser had been called in because of a vast difference in valuation between the two firms. Despite calling the brokerage an important part of its future, Morgan Stanley valued the enterprise at about $9 billion, well below the $23 billion that Citigroup had described.

By settling on the $13.5 billion value, the two banks have aimed at establishing a firm valuation for Morgan Stanley Smith Barney, without needing to call in a third party to reassess the brokerage’s value for every stake purchase.

The business — melded from Citigroup’s Smith Barney unit and Morgan Stanley’s counterpart — has become an increasingly important part of Morgan Stanley’s business future. The brokerage business’s stable profits, arising from the management of wealthy customer’s assets, stand in contrast to the weaker earnings at the rest of Morgan Stanley’s operations.

“This mutually beneficial agreement gives both parties certainty and transparency on price and timing, and is a significant milestone for Morgan Stanley in the implementation of our strategy,” James P. Gorman, Morgan Stanley’s chairman and chief executive, said in a statement.

But the relatively low valuation of the brokerage will mean that Citigroup will need to take a write-down in its third quarter, costing the firm a big charge against earnings and capital. The firm disclosed in a regulatory filing on Tuesday afternoon that it will record a $2.9 billion after-tax charge related to the sale of the 14 percent stake, though the transaction will not hurt its overall capital ratios.

Still, selling off Smith Barney is a legacy of Citigroup’s efforts to shed noncore businesses as it rebuilds itself from the financial crisis of 2008. The firm had put the brokerage unit in Citi Holdings, a collection of assets it had designated as not important for its future model. Among the reasons: such a business requires a relatively large amount of capital.

Vikram S. Pandit, Citigroup’s chief executive, said: “As we have shown, the more we put the past behind us, the more we can focus on our future, which is in the core businesses in Citicorp.”

In early afternoon trading on Tuesday, shares of Morgan Stanley were up 3 percent, and Citigroup shares were up 2.4 percent.

The joint venture deal between the banks was forged in 2009. Mr. Gorman has emphasized the importance of the business over the last year. In July, he said, “Our wealth management business will considerably increase its value to our clients and financial advisers through superior functionality, and to our shareholders through enhanced and stable earnings.”

He has also said the brokerage business would be renamed Morgan Stanley Wealth Management, retiring a name that dates to the 1938 merger of the brokerage firms Charles D. Barney & Company and Edward B. Smith.