Citigroup may be looking to exit the Morgan Stanley Smith Barney joint venture sooner rather than later.
Morgan Stanley Smith Barney, based in Purchase, is the wealth management joint venture of Citigroup and Morgan Stanley. Morgan owns 51 percent, Citigroup 49 percent. As of May 31, Morgan Stanley will have an option to buy 14 percent more from Citigroup. It has options through May 2014 to buy the remainder in two more steps. Citigroup”™s stake was worth as much as $10.3 billion as of Dec. 31.
Analysts say though, there”™s a good chance both sides will not want to wait two years to get the business entirely into Morgan Stanley”™s hands.
“Clearly, Citi would like to do it now rather than later,” said Gerard Cassidy, analyst at RBC Capital Markets. “Citi and Morgan have agreed to sell 14 percent this year, 15 percent next year and 20 percent the year after. It”™s in Citi”™s best interest to sell as soon as possible because of the required capital needed to support the business. By selling it off, their capital ratios will improve, which will put them on stronger footing with bank regulators.”
From Morgan Stanley”™s standpoint, he said, they would like to buy all of the business at a reasonable price
“It diversifies their revenue stream, and makes them less reliant on capital market businesses; they would have the more stable revenues from wealth management. That, should help their credit ratings over long run.”
Morgan Stanley”™s credit ratings have been under siege. It is currently rated A2 by Moody”™s, but is one of only three banks under review by the firm that faces a possible three-notch downgrade. That would lower the rating to Baa2.
Dick Bove, an analyst at Rochdale Securities, pointed out that while Moody”™s has Morgan Stanley on a short list for a three-notch downgrade, it is down on banks in general.
“Moody”™s put out a report indicating they were going to downgrade the ratings of a large number of banks, virtually every major bank in the U.S., and worldwide, too. They believe the industry itself is unattractive. The unknowns are too great, government interference has made it less attractive and the banking industry doesn”™t control most facets of its business, like prices ”“ it doesn”™t control interest rates ”“ and loan quality, they don”™t have control over their destiny.”
Still, Bove said there is a “high probability” of an accelerated deal. “It comes down to your belief on where the stock market is going. If you think the market will be strong for the rest of the year, you”™ll do it because if it is going up you”™ll capture all the earnings for yourself. I think the market will do well and I think Morgan Stanley thinks the market will do well.”
He also said Citigroup may want to get rid of this business because the Federal Reserve denied its request to raise its dividend. Selling its stake would give it more flexibility to boost the payout.
Cassidy said how Morgan Stanley would finance a purchase would determine the effect, if any, on its debt rating.
“If it is done in a manner that enables them to prove to regulators that they will have the less volatile revenues coming from wealth management” its debt rating may not suffer, he said. “I would certainly say both parties are interested in moving forward on this and having it end up all with Morgan Stanley.”
Chip MacDonald, a lawyer at Jones Day who works on financial mergers and acquisitions, said, “They”™re already pretty married. Just like other joint ventures it makes sense for one side or the other to take control and have full ownership.”
He also brought up the issue of how Morgan Stanley would finance a deal as an area of concern. “I think it”™ll happen, it”™s just a question of when.”
