Morgan Stanley and Citigroup have agreed on a price for Morgan Stanley to buy Citi out of their wealth management joint venture, Morgan Stanley Smith Barney Holdings LLC (MSSB).
The firms said today that they have settled on a US$13.5 billion valuation for MSSB. The agreement facilitates Morgan Stanley’s planned purchase of a further 14% in the firm from Citi. And, at the same time, they’ve agreed to a deal for Morgan Stanley to buyout Citi’s remaining 35% of the joint venture by June 1, 2015. Morgan Stanley has agreed to acquire the next 15% stake in MSSB from Citi by June 1, 2013, subject to regulatory approval.
“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,” said James Gorman, chairman and CEO of Morgan Stanley.
Vikram Pandit, CEO of Citi, said, “I am pleased we have reached agreement on a value for our remaining stake in Morgan Stanley Smith Barney. Establishing certainty regarding the divestiture of this business is in the best interests of our shareholders.”
Fitch Ratings says that it considers the agreement to be a positive development for Morgan Stanley, and a less significant net positive for Citi.
For Morgan Stanley, it says that the move to increase ownership of MSSB “should improve earnings diversification and stability” particularly if management’s operating margin target for the global wealth management segment is reached.”
It notes that Morgan Stanley’s wealth management business has been much more resilient to challenging markets than its institutional side. And, it says, added deposits from MSSB help to further diversify its funding base.
For Citi, it notes that the transaction will result in a moderately higher accounting charge than expected, but that it will be accretive to capital under Basel III. The US$1.9 billion in cash that the firm will receive is modest in the context of Citi’s existing pool of cash and other liquid assets, it says, and the loss of MSSB-related deposits is also quite small given Citi’s total deposit base of more than $900 billion.
The agreement to buy the remaining shares removes future uncertainty over the purchase price for the remaining Citi stake, Fitch notes. “This will prevent lengthy negotiation periods and market uncertainty over final pricing,” it says.