Morgan Stanley and Citigroup have pushed the deadline for determining the fair market value of their Morgan Stanley Smith Barney joint venture to Sept. 10 as they wait for an independent appraisal to help reconcile their opposing values of the business.
The decision to extend the deadline was disclosed by Morgan Stanley in an announcement that was released after the markets closed on Tuesday.
Morgan Stanley, which currently owns a 51% stake in Smith Barney, announced on May 31 that it planned to purchase an additional 14% stake in its phased acquisition of the business. Under the terms of the joint venture, the firm is required to give 90 days notice prior to exercising its call option to give both firms a chance to agree on the purchase price.
In July, Citigroup signaled in a regulatory filing that it was not in agreement with Morgan Stanley on a purchase price. Citi valued its interest as more than its approximate $11 billion carrying value as of June 30, according to the filing. Morgan Stanley's valuation for the entire joint venture was about 40% of Citi's fair market valuation, that filing said.
The difference between the two firms' valuations of the joint venture is about $13 billion to $14 billion, according to published reports.
The two firms are required to get an independent appraisal for the business if they have a difference of more than 10% in their valuations. Under the terms of their agreement, an appraisal in the middle of both firms' valuations will stand as the final fair market value. But if the third appraisal is higher, it will be averaged with the next highest value to determine fair market value. If the third appraisal is lower, it will be averaged with the next lowest value to determine fair market value.
A Morgan Stanley spokesman declined to provide further comment on Tuesday. Neither Citigroup nor Perella Weinberg Partners, the financial services firm that is acting as the independent arbitrator, were available for comment.
In an interview with On Wall Street on Wednesday, Rochdale Securities bank analyst Dick Bove said the outcome of the negotiated price will weigh more heavily on Morgan Stanley than on Citigroup. That is because the transaction will not negatively affect Citigroup's earnings or require the firm to raise capital. Instead, Citigroup will get cash for the business that has not provided high returns, according to Bove.
"Morgan Stanley is going to get better control of the earnings of Smith Barney, and it's up to Morgan Stanley to make sure those earnings go up," Bove said.
In its July filing, Citigroup said that Morgan Stanley's "unexpectedly low value" of the business meant that a third party appraisal could result in a "significant non-cash GAAP charge to net income in the third quarter 2012," and possibly affect its tangible book value and equity and Basel I regulatory capital ratios.
"Citi continues to believe that [Citigroup Global Market Inc.'s] fair market valuation of the full MSSB [joint venture], as well as its carrying value for its 49% interest in the MSSB [joint venture], are reasonable and supportable," Citigroup's filing said.
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