Citigroup Willing to Sell All of Smith Barney, Schorr Says
Citigroup Chief Financial Officer John Gerspach and Chief Operating Officer John Havens indicated a willingness to sell more than the scheduled 14 percent stake in Morgan Stanley Smith Barney if Morgan Stanley makes an attractive offer, Schorr wrote in a note to clients today, citing a recent meeting with the executives.
Morgan Stanley has the option to buy a 14 percent stake in the joint venture in May, increasing its ownership to 65 percent, and can purchase the business outright over the next two years. In 2009, Morgan Stanley (MS) bought a controlling stake in the joint venture, which has more than 17,000 advisers and $1.65 trillion in client assets.
The firms would have to renegotiate their existing deal, and Morgan Stanley, which got Federal Reserve approval for acquiring the 14 percent stake, would have to submit a new capital plan to regulators, according to a person briefed on the situation who declined to be named because an agreement hasn’t been reached.
Jim Wiggins, a spokesman for New York-based Morgan Stanley, declined to comment on whether the firm was interested in buying the rest of Citigroup’s stake. Shannon Bell, a spokeswoman for Citigroup, also declined to comment.
Under the current agreement, New York-based Citigroup and Morgan Stanley will submit their estimates of the fair value of the brokerage. If the estimates are within 10 percent of each other, the stake will be sold at the average of the two estimates, according to the person. If the difference is more than 10 percent, the firms would bring in an outside appraiser, the person said.
Howard Chen, an analyst at Credit Suisse Group AG (CSGN), estimated the value of the brokerage at $15 billion in a January note to clients. David Trone, a JMP Securities analyst, said in a note the following month that the unit is worth $24 billion.
Morgan Stanley’s global wealth management division, which is mostly composed of the brokerage, had a 10 percent pretax profit margin in 2011, well below Chief Executive Officer James Gorman’s goal of more than 20 percent. Greg Fleming, who runs the division, has vowed to increase that to a margin in the “mid-teens” by the first half of next year regardless of the market’s performance.
The firm’s shares, which climbed 33 percent this year through yesterday, slid 1.1 percent to $19.85 at 9:51 a.m. in New York. Citigroup, up 44 percent this year through yesterday, fell 1 percent to $37.42.
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