Morgan Stanley will pay Citigroup Inc. $1.89 billion for another 14% interest in the mssb.htm" title="http://topics.investmentnews.com/companies-and-associations/morgan-stanley-smith-barney-mssb.htm">Morgan Stanley Smith Barney joint venture they formed in 2009. The $13.5 billion valuation agreed to by the banks today is significantly closer to Morgan's estimate than Citigroup's.
“It looks like Morgan Stanley got the better end of the deal,” said Alois Pirker, a senior analyst with Aite Group LLC. “The $13.5 billion figure seems low for such a large firm.”
The two banks were at loggerheads over the value of the brokerage business—until recently the largest in the country in terms of the number of financial advisers. In a regulatory filing in July, Citigroup pegged the value at over $22 billion, while Morgan Stanley put it at $9 billion.
Third-party appraiser Perella Weinberg Partners LP was called in to help settle the matter, but the two firms hammered out the details themselves. “The $13.5 billion valuation was negotiated by the two parties,” said Morgan Stanley spokeswoman Sandra Hernandez.
The two banks also agreed that the valuation will serve as the basis for Morgan Stanley's future purchases of Citigroup's remaining 35% stake in the venture before June 1, 2015. Morgan will be paying out another $4.725 billion, according to its Form 8-K filing with the Securities and Exchange Commission. It also has the option to accelerate the purchase before the deadline.
“It's good news for Morgan Stanley because they fixed the price for the rest of the deal,” said Mr. Pirker.
Morgan Stanley has had the difficult task of talking up the company's wealth management-focused strategy under chief executive James Gorman to the investment community while talking down the actual value of the business in its negotiations with Citigroup. “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,” Mr. Gorman said in a statement.
Citigroup, on the other hand, is facing a large write-down of the value of its stake in the joint venture. With the bank intent on selling off assets and paring down businesses to improve its financial position, the deal at least removes more uncertainty for Citigroup. “The more we put the past behind us, the more we can focus on our future, which is in the core business in Citicorp,” said chief executive Vikram Pandit.
The low price for MSSB, which has seen its adviser ranks shrink from more than 20,000 at the time of the merger to less than 17,000 this year, doesn't inspire a lot of confidence, said Sanford Bernstein & Co. Inc. analyst Brad Hintz.
“Citigroup's action isn't a ringing endorsement of the rising future value of MSSB, nor of its confidence in the management of the joint venture,” said Mr. Hintz. “Vikram is practicing a 'take the money and run' strategy.”
Both companies' stock prices rose on news of the deal.