Morgan Stanley and Citigroup have agreed to a $13.5 billion valuation of Smith Barney that clears the way for Morgan Stanley to complete its acquisition of the brokerage business by June 2015.
The valuation was determined with the help of an independent arbitrator after a standoff between the two firms over how the firm would be valued after Morgan Stanley said in May that it plans to acquire its next 14% stake in the business. Morgan Stanley currently owns 51% of Smith Barney.
The $13.5 billion valuation is closer to what Morgan Stanley reportedly argued that the business was worth, at about $9.5 billion, while Citigroup said it should be valued at $22.5 billion. That led the firms to bring in Perella Weinberg Partners as an independent arbitrator to reconcile that $13 billion difference, as per the terms of the original joint venture. The deadline for a decision was Sept. 10.
With the deal announced by both firms on Tuesday, Morgan Stanley is set to acquire the next 14% stake, including the transfer of about $5.5 billion in deposits, based on that $13.5 billion valuation. Morgan Stanley will acquire the last 35% of Smith Barney, with about $48 billion in deposits, by June 1, 2015 at that same valuation. The firm is scheduled to acquire the next 15% of Smith Barney by June 1, 2013. The terms of the agreement are 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.
Citi Chief Executive Vikram Pandit also said he was "pleased" to have reached an agreement in a statement, indicating that divesting the business will allow the firm to focus on its core businesses. Citi has reduced its assets by more than $600 billion since it formed Citi Holdings in 2009, he said.
Research, strategy and consulting firm Tiburon Strategic Advisors' Managing Partner Charles "Chip" Roame called the agreement a win for Morgan Stanley and a loss for Citi, because it came closer to the price named by Morgan Stanley. Still, Citi investors might have been expecting this, Roame said, because the agreement did not negatively impact its stock price. Citigroup's stock closed up 2.61% at $32.66 per share on Tuesday. Morgan Stanley's stock rose 3.85% to reach $17.25 per share.
"I think this might suggest the old wirehouse brokerage model is not worth as much as some believe, that profit margins will be lower," Roame said of the valuation. The transaction should be a "good move" for Morgan Stanley, Roame said, and should allow them to further shape their brokerage business.
"I assume that they will make some strategic moves, reposition their [financial advisor] force in one or more revolutionary ways after the close," Roame said.
Morgan Stanley is already in the midst of transforming its brokerage business, having announced cuts to its number of complexes and non-producing branch manager force last month. Those changes marked its last moves to combine its two brokerage businesses first put together in 2009, reports said at the time.
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