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Morgan Stanley, Citi Agree On Smith Barney Valuation

A third party has valued Morgan Stanley Smith Barney at $13.5 billion, as Morgan Stanley and Citigroup reach a deal to transfer the business to Morgan Stanley.
A third party has valued Morgan Stanley Smith Barney at $13.5 billion, as Morgan Stanley and Citigroup reach a deal allowing the transfer of the business over in full to Morgan Stanley.
The agreement means that Morgan Stanley can go ahead and buy Citi out of the joint venture. It will purchase an extra 14 per cent stake in the business initially, and buy the remaining 35 per cent stake no later than 1 June 2015, pending regulatory approval. This will be done in steps, with Morgan Stanley set to purchase another 15 per cent stake by June 2013.
The 14 per cent stake will see around $5.5 billion of deposits transferred at no premium, while the 35 per cent stake is inclusive of around $48 billion of deposits.
"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," said James Gorman, chairman and chief executive of Morgan Stanley.
The two firms initially disagreed over the valuation of the JV, with Citigroup Global Markets pricing Citi’s 49 per cent stake at around $11 billion. Morgan Stanley’s valuation for the full business, however, was around 40 per cent of Citi’s valuation of the business, according to a regulatory filing.
At the end of August Citigroup said in the filing that due to the "unexpectedly low" valuation given to MSSB by Morgan Stanley, and depending on the ultimate purchase price, it could face "a significant non-cash GAAP charge to net income in the third quarter 2012."
“Establishing certainty regarding the divestiture of this business is in the best interests of our shareholders,” said Vikram Pandit, chief executive of Citi.
“As we have shown, the more we put the past behind us, the more we can focus on our future, which is in the core businesses in Citicorp. Since forming Citi Holdings, we have reduced its assets by over $600 billion, and we will continue to do so in an economically rational manner."
The original 2009 deal saw Citi exchange 100 per cent of its Smith Barney, Smith Barney Australia and Quilter units for a 49 per cent stake in the venture and an upfront cash payment of $2.7 billion. Meanwhile, Morgan Stanley made the cash payment and exchanged 100 per cent of its global wealth management business for a 51 per cent stake in the joint venture.