Morgan Stanley plans to purchase another 14% interest in Morgan Stanley Smith Barney LLC —the brokerage joint venture the firm formed with
Citigroup in 2009.
Morgan has received regulatory approval for the transaction and it plans to give
Citigroup official notice of its intention June 1, according to a statement released by the company today.
Morgan Stanley paid
Citigroup $2.75 billion for a controlling 51% stake in the combined brokerage operations along with options to purchase the rest of the business. The joint venture agreement laid out a schedule of transactions for Morgan to complete the purchases. It can buy another 15% stake in the venture in June of next year and the remaining 20% of the business in June 2014.
Some Wall Street analysts suggested that Morgan Stanley might try to accelerate the purchase given the currently depressed values of brokerage operations. “It's a good time to buy the remainder of the business,” Dick Bové, an analyst with Rochdale Securities LLC, said last month. Such a move, however, might have had negative consequences for Morgan Stanley's credit rating. It already faces potential downgrades from Moody's Investor Services Inc. and Standard & Poor's Rating Services.
Morgan Stanley spokesman Jim Wiggins said the company planned to proceed with the process laid out in the joint venture agreement. “[Morgan Stanley chief executive] James Gorman has made it clear that we intend to follow the schedule and it would be an extraordinary circumstance for us to do otherwise,” he said. “It would require a separate negotiation with
Citigroup.”
The two now have to agree on a price. Analysts peg the value of
Citigroup's 49% stake in the venture at about $10 billion. According to the process laid out in an 8K filing with the Securities and Exchange Commission, the two firms have 90 days to settle on the terms for this transaction. Both will appraise the value of the business and if the two appraisals are within 10% of each other, the sales price will be the average of the two.
If the two appraisals are not within 10% of each other, a third-party appraiser will decide the price. That third party has not been determined yet, Mr. Wiggins said.
In a statement,
Citigroup suggested Morgan's decision to exercise its purchase option coincided with its own business strategy. "Several years ago, after taking a dispassionate look at all of our businesses, we placed Morgan Stanley Smith Barney in Citi Holdings because we decided it was not core to our strategy."
Morgan Stanley Smith Barney had 17,193 financial advisers managing $1.74 trillion in assets at the end of the first quarter. The advisers' annual revenue production was $787,000, according to the firm's 10Q filing.
