Morgan Stanley to buy Citi's Smith Barney stake
NEW YORK (AP) — Morgan Stanley and Citigroup have settled a dispute Tuesday over the value of the brokerage firm Morgan Stanley Smith Barney, which they jointly own.
The deal clears the way for Morgan Stanley to buy Citigroup's 49 percent interest in the broker, giving Morgan Stanley full ownership. It will also result in a $2.9 billion after-tax charge for Citi.
Morgan Stanley will purchase Citi's interest in Smith Barney in stages, starting with a 14 percent stake for $1.89 billion. It will buy the rest by June 1, 2015.
The deal values Smith Barney at $13.5 billion. It is a victory for Morgan Stanley, which bought 51 percent of Smith Barney from Citi during the height of the financial crisis in January 2009. CEO James Gorman is keen to up Morgan Stanley's stake in the brokerage at a time when the bank is struggling to make money.
Regulatory changes have cut some of Morgan Stanley's more lucrative trading businesses, and investment banking and trading carry more risk in a weak economy. In the second quarter, Morgan Stanley reported a 37 percent drop in its investment banking revenue.
"(The deal) is a significant milestone for Morgan Stanley in the implementation of our strategy," James P. Gorman, CEO of Morgan Stanley, said in a statement.
The agreement ends a tussle over the valuation of Smith Barney. Both banks hired third-party appraisers at the end of August after Citigroup said it had valued Smith Barney at around $22 billion. Morgan Stanley's valuation is about 40 percent of Citi's appraisal value.
Each company's stock rose after the agreement was announced. Morgan Stanley rose 41 cents to $17.02, and Citi rose 84 cents to $32.67.
Citi incurred the charge because it valued its 49 percent Smith Barney stake on its books at $11.3 billion. However, the deal that was announced values Citi's stake at about half of that.