A pair of banking giants reached a deal on Tuesday that will see Morgan Stanley (MS) assume full control of Morgan Stanley Smith Barney, its joint venture with Citigroup, Inc. (C).
The agreement ends a three-month dispute over fair market value for Smith Barney.
Morgan Stanley will initially up its stake by buying 14 percent of Citi's interest in the firm. The agreement allows Morgan Stanley to incrementally up its holdings by taking over all of the 49% stake currently held by Citi.
Morgan Stanley was looking to use a purchase price based on a valuation of $9.5 billion, while Citigroup was looking for a far reaching valuation of about $22.5 billion. Both have now agreed to a market valuation of $13.5 billion, much nearer to Morgan Stanley's liking.
Morgan Stanley will also get transferred about $5.5 billion of deposits at no premium.
Under the terms of the joint venture, June 1, the third anniversary of the joint venture, is the first date on which Morgan Stanley may exercise its call option to buyout another 14 percent stake from Citigroup. Morgan Stanley currently owns 51 percent of Smith Barney, while Citigroup owns 49 percent.
Citigroup CEO Vikram Pandit had disclosed while entering the joint venture in September 2009 that they would eventually divest its entire 49 percent stake in the joint venture to partner Morgan Stanley.
Meanwhile, Morgan Stanley got the right to take full control of Smith Barney in increments between 2012 and 2014, as per the terms agreed by the companies in 2009. However, the two parties have now agreed to a deadline of June 1, 2015 for Morgan Stanley to buy Citigroup's remaining 35 percent stake in Smith Barney, including deposits of about $48 billion, 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," Morgan Stanley Chairman and CEO James Gorman said in a statement.
"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," Pandit noted.
The brokerage joint venture was formed in June 2009 when Citigroup completed the sale of 51 percent of Smith Barney to Morgan Stanley for $2.7 billion in cash. The deal was struck in January 2009.
Smith Barney was formerly a division of Citi Global Wealth Management. It was merged with Morgan Stanley's Global Wealth Management Group.
In Tuesday's regular trading session, MS is currently trading at $16.87, up $0.26 or 1.57% on a volume of 5.15 million shares, and C is trading at $32.61, up $0.78 or 2.45% on a volume of 15.35 million shares.
by RTT Staff Writer
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