Morgan Stanley May Sell Commodities-Unit Stake to Fund
Morgan Stanley (MS) is in advanced talks to sell part of its commodities business to the Qatar Investment Authority for $1 billion or more, CNBC reported, citing unidentified people familiar with the matter.
Negotiations, which could still fall apart, have focused on selling a minority stake in the unit to the sovereign-wealth fund, CNBC said. Mary Claire Delaney, a spokeswoman for the bank, declined to comment on the report. There was no response to an e-mail sent to the Qatari fund’s press office.
Morgan Stanley, the sixth-biggest U.S. bank by assets, had its credit rating cut two levels by Moody’s Investors Service last month, requiring the firm to provide more collateral to trading partners. Chief Financial Officer Ruth Porat, 54, told analysts and investors on a conference call yesterday that clients had shied from doing business with the bank as they waited to see whether it would be cut two or three grades, and they “re-engaged” with the firm afterwards.
“If I were CFO of a major commodities player having just lost its ratings and competing against firms that have better credit ratings, then I would ask Moody’s and S&P if I could get higher ratings for my commodities subsidiary if the firm recapitalized it with more equity,” Brad Hintz, an analyst at Sanford C. Bernstein & Co. and a former Morgan Stanley treasurer, wrote in an e-mailed response to questions.
The bank held talks with private-equity firms including Blackstone Group LP (BX) as it considers options for the unit if the Volcker rule, which limits banks from trading for their own account, outlaws some activities, people familiar with the New York-based company’s deliberations told Bloomberg News last month.
For regulatory purposes, it makes sense for the firm to consider seeking “a third party to hold inventories of physical commodities and provide financing,” Hintz said.
Qatar Holding LLC, an investment arm of the Qatar Investment Authority, has already made investments in European firms including Credit Suisse Group AG (CSGN), which competes with Morgan Stanley in investment banking, wealth management and asset management.
Qatar Holding is the second-largest shareholder in Xstrata Plc (XTA), a Zug, Switzerland-based mining company, and last month asked Glencore International Plc (GLEN), the largest publicly traded commodities supplier, to raise its offer for Xstrata. Glencore competes with Morgan Stanley and other banks in commodities trading.
While the Qatari fund was previously interested in a larger holding in Morgan Stanley’s commodities unit, Morgan Stanley executives wanted to retain a majority stake, CNBC said.
The commodities business, run by Colin Bryce and Simon Greenshields, both age 56, generated about $1.5 billion in annual revenue the past two years, Kian Abouhossein, a JPMorgan Chase & Co. (JPM) analyst, estimated in a March note.
The unit includes trading in futures contracts and buying and selling physical commodities. The Volcker rule would impair firms’ ability to provide commodity-related hedging and financing services as currently written, Greenshields wrote in a comment letter to regulators in February.
Morgan Stanley has received capital injections from overseas companies in the last five years. In 2007, it sold a $5 billion stake to China Investment Corp., that nation’s sovereign-wealth fund. The next year, Mitsubishi UFJ Financial Group Inc., Japan’s biggest publicly traded lender, paid $9 billion for a stake, making it Morgan Stanley’s largest shareholder.
Morgan Stanley’s stock, which has dropped 15 percent this year, is trading at about 50 percent of its tangible book value, a measure of how much the company would be worth if it were liquidated. The shares slid 3.6 percent today to $12.78.
Charles Peabody, an analyst at Portales Partners LLC who rates Morgan Stanley sector perform, thinks that a sale may be part of an effort by the firm to get the value of its commodities unit recognized by the market, rather than to raise capital.
“We believe that this is likely an effort to realize value, rather than a need to infuse capital,” Peabody wrote in a memo he provided to Bloomberg News. The plan could be part of an effort “to appease investor demands for better value realization.”
The bank doesn’t break out revenue from its commodities business, which reports within the fixed-income and commodities unit. That business posted $3.36 billion in revenue in the first half, excluding accounting charges, down 12 percent from a year earlier. Colm Kelleher, the 55-year-old co-president of the firm’s institutional securities group, oversees all trading, including the commodities unit.
The commodities unit had a “much weaker” second quarter than the first quarter, which was partly responsible for the decline in revenue at the fixed-income and commodities unit, Porat said on yesterday’s conference call.
“It tends to be a lumpy business,” she said. “It’s a mix of both flow and structured solutions for clients. We had a number of structured solutions for clients last quarter. We didn’t have any this quarter.”
The 10 largest global investment banks generated about $7 billion from commodities trading each of the last two years, down from more than $12 billion in 2009 and 2008, according to data from industry analytics firm Coalition Ltd. Morgan Stanley has about a 15 percent to 20 percent market share among banks, Glenn Schorr, a Nomura Holdings Inc. (8604) analyst, estimated last year.
Morgan Stanley and Goldman Sachs Group Inc., which used to dominate commodities trading among Wall Street banks, have lost some ground to New York-based JPMorgan and London-based Barclays Plc, according to a survey of corporate treasury officials by Greenwich Associates that was published in March.
The study found that JPMorgan and Barclays tied Goldman Sachs and surpassed Morgan Stanley in the share of clients who use them for over-the-counter energy derivative trades.
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