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Ever since Smith Barney was created in 2009, its majority shareholder, Morgan Stanley (NYSE:MS), has been expected to buy out Citigroup’s (NYSE:C) stake in the joint venture. The only question: How much would Wall Street’s largest brokerage sell for?
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When the two banks could not decide on the value, independent arbiter Perella Weinberg Partners determined the business to be worth $13.5 billion. The final valuation was not only a win for Morgan Stanley, but alerted Wall Street to the future profitability of the brokerage industry. Citi’s own estimate of $22 billion, a figure that represents 50 times current one-year earnings, was seen by analysts as signaling a brighter future, while Morgan Stanley’s $9 billion estimation was seen as representing weaker conditions.
“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,” Morgan Stanley’s chairman and chief executive, James P. Gorman, said in a statement.
Smith Barney, created from Citigroup’s Smith Barney unit and Morgan Stanley’s counterpart, has become an increasingly important part of the latter’s business future. The brokerage business brings much stabler profits than Morgan Stanley’s more volatile business of investment banking. Tuesday’s agreement allows Morgan Stanley to buy an additional 14 percent of Smith Barney, raising the company’s stake in the brokerage to 65 percent. According to the company’s plan, it will buy another 15 percent from Citigroup by next June, and the remainder of the operation by June 2015.
However, for Citi, the lower valuation means the bank must take a write-down in its third quarter that will cost the firm a huge charge against its earnings and capital. Yet, selling off Smith Barney is part of Citigroup’s efforts to shed non-core assets.
In this morning’s trading, shares of Morgan Stanley are up one percent and those of Citigroup are up slightly.
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