BREAKINGVIEWS-James Gorman edges Vikram Pandit in JV showdown

Tue Sep 11, 2012 9:38pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Richard Beales

NEW YORK, Sept 11 (Reuters Breakingviews) - Chalk one up for James Gorman in the latest showdown of bank bosses. The Morgan Stanley (MS.N) chief executive and Vikram Pandit, his counterpart at Citigroup (C.N), were miles apart on the value of Morgan Stanley Smith Barney, the joint venture wealth management unit Gorman’s firm is gradually buying from Citi. The agreed $13.5 billion price tag is closer to where Morgan Stanley pegged it. More significantly, Gorman now knows what the whole deal will cost.

The two banks have been at an impasse. Citi reckoned the whole business was worth at least $22 billion; Morgan Stanley’s figure, at least for negotiating purposes, was about $9 billion. That necessitated an outside appraisal, from Perella Weinberg, to value the 14 percent stake immediately in question. The two bank chiefs, however, eventually decided to thrash out their own single valuation for the whole of the 49 percent interest in MSSB that Gorman’s firm will buy from Citi over the coming years.

Meeting in the middle would have put the price for 100 percent of MSSB at around $15.5 billion. The final number is nearer Morgan Stanley’s, which represents a mathematical victory. And while certainty on price is useful for both parties, it’s arguably more important for Gorman, for whom wealth management will continue to be a core business, than for Pandit, who is exiting the venture.

Moreover, Citi warned in July that it might need to book a non-cash hit to profit in the third quarter if MSSB ended up worth much less than it expected. That’s now the case, though the shortfall is less than the original valuation gap. Citi’s carrying value for its stake at the end of June was about $11 billion. Based on the new agreement, it needs to come down by more than $4 billion.

That’s partly because the JV, engineered back in 2009, hasn’t performed as well as initially hoped. Now Morgan Stanley will have the chance, and the motivation, to make it work better – and Citi won’t benefit if Gorman succeeds. Ending the fight once and for all with more certainty on timing as well as valuation is no bad thing for Pandit. Even so, in this particular battle, his rival got the better of him.

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CONTEXT NEWS

- Morgan Stanley and Citigroup said on Sept. 11 they have reached agreement for Morgan Stanley to purchase a 14 percent stake in Morgan Stanley Smith Barney from Citi at an implied valuation of $13.5 billion for 100 percent of the wealth management joint venture.

- In addition, subject to regulatory approval, the two firms agreed on the sale of Citi’s remaining 35 percent stake in MSSB at the same implied valuation no later than June 1, 2015. The next 15 percent stake sale is targeted to occur by June 1, 2013.

- The two banks previously disagreed on valuation, as outlined by Citi in a regulatory filing on July 19. At the time, Citi said it believed its 49 percent stake in MSSB was worth around $11 billion, implying a $22.5 billion value for the whole JV. In its filing, Citi stated that Morgan Stanley’s valuation for the entire business was around 40 percent of Citi’s estimates, implying around a $9 billion valuation for the whole business.

- As required by the agreement between the two banks, they appointed Perella Weinberg as an arbitrator to set a price for the 14 percent stake sale. The valuation unveiled on Sept. 11, however, covered the whole of Citi’s remaining stake and was negotiated between the banks, Morgan Stanley said.

- Reuters: Morgan Stanley, Citigroup value brokerage at $13.5 bln [ ID:nL1E8KB6R7]

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(Editing by Jeffrey Goldfarb and Martin Langfield)

((richard.beales@thomsonreuters.com)) Keywords: BREAKINGVIEWS MORGANSTANLEY/CITI

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