The rumoured deal to create a brokerage giant by combining Morgan Stanley’s Global Wealth Management Group and Citi’s Smith Barney has been reached, with the firms agreeing to create a new joint venture to be called Morgan Stanley Smith Barney.

The joint venture combines businesses that have more than 20,000 financial advisors; US$1.7 trillion in client assets; US$14.9 billion in pro-forma combined revenues; and US$2.8 billion in pro-forma combined pre-tax profit.

Under the terms of the agreement announced Tuesday, Citi will exchange 100% of its Smith Barney, Smith Barney Australia and Quilter units for a 49% stake in the joint venture and an upfront cash payment of US$2.7 billion. Morgan Stanley will exchange 100% of its Global Wealth Management business for a 51% stake in the joint venture. After year three, Morgan Stanley and Citi will have various purchase and sale rights for the joint venture, but Citi will continue to own a significant stake in the joint venture at least through year five.

The transaction, which has been approved by the boards of both companies, is expected to close in the third quarter, subject to regulatory approvals and other customary closing conditions.

Citi said it will benefit from this transaction by monetizing its investment in its wealth management business, while continuing to benefit from a multi-year earnings stream as it simplifies and streamlines its organizational structure. At closing, Citi will recognize a pre-tax gain of approximately US$9.5 billion, or approximately US$5.8 billion on an after-tax basis, and will create approximately US$6.5 billion of tangible common equity.

Citi CEO Vikram Pandit said, “For Citi, the joint venture provides significant synergies and scale, substantially reduces our expenses and enables us to retain a significant stake in a company that immediately becomes the industry leader with real growth opportunities.”

John Mack, chairman and CEO of Morgan Stanley, said, “This joint venture is an important step forward in our effort to build our wealth management franchise, which we believe will be an increasingly important and profitable part of Morgan Stanley’s business in the years ahead.”

The joint venture is expected to achieve cost savings of approximately US$1.1 billion — in part by rationalizing and consolidating key functions including technology, operations, sales support, product development and marketing. These operational efficiencies represent approximately 15% of the combined firm’s estimated expense base, excluding financial advisors’ commission compensation.

IE