Morgan Stanley Prevails as MSSB Value Set at $13.5 Billion
September 11, 2012
Morgan Stanley agreed to buy the rest of its brokerage joint venture from Citigroup Inc. at a fixed price that values the entire unit at $13.5 billion -- or about 40 percent less than Citigroup’s estimate two months ago.
Morgan Stanley will pay $1.89 billion for a 14 percent stake this year and $4.73 billion for the remaining 35 percent by 2015, New York-based Citigroup said today in a filing. The lender said it expects to take a $2.9 billion third-quarter charge, a sum that exceeds the average profit estimate by analysts in a Bloomberg survey.
The valuation -- closer to Morgan Stanley’s $9 billion estimate than Citigroup’s $22 billion -- reflects the venture’s struggle to boost earnings amid a trading slump and global economic weakness. Still, the price is “a steal” for New York- based Morgan Stanley, said David Trone, a JMP Securities LLC analyst. Both banks’ shares rose as the deal may help avert future disputes when Citigroup sells its remaining stake.
“Establishing certainty regarding the divestiture of this business is in the best interests of our shareholders,” Citigroup Chief Executive Officer Vikram Pandit, 55, said in a statement. “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.”
Morgan Stanley climbed 3.2 percent to $17.14 at 1:56 p.m. in New York. Citigroup advanced 2.6 percent to $32.67.
The two banks in 2009 formed the venture, with the most financial advisers of any brokerage, and Morgan Stanley paid $2.75 billion for a 51 percent stake and the right to buy the rest over time. Morgan Stanley agreed to buy the next 15 percent piece of the brokerage by June and complete the purchase by June 2015.
Citigroup’s charge on a pretax basis was $4.7 billion, exceeding the $4.4 billion predicted by Ed Najarian, an analyst at International Strategy & Investment Group Inc. The lender may post a $2.72 billion profit for the third quarter, according to the average estimate of nine analysts surveyed by Bloomberg. The sale of the 14 percent stake should boost the bank’s Tier 1 common equity ratio under Basel III rules by 0.14 percentage point, the bank said.
The pricing victory for Morgan Stanley also casts doubt on the prospects of one of its most crucial businesses. CEO James Gorman, 54, has said the purchase of the whole brokerage is a key to his strategy of making the firm less reliant on trading revenue and improving profitability.
A valuation of $13.5 billion suggests a long-term earnings growth rate of less than 3 percent, assuming a 10 percent discount rate, according to Goldman Sachs Group Inc. analysts. The business, which had 16,934 financial advisers as of June 30, has struggled to make progress toward Gorman’s goal of a 20 percent pretax profit margin. The unit hasn’t topped 12 percent since the venture was formed.
The unit has also faced broker complaints about disruptions caused by a new technology and operations system. Greg Fleming, who runs the business, met with financial advisers in the U.S. during the past few weeks to assure them the firm is working to make improvements.