(By Mani) Investment bank Morgan Stanley (NYSE:MS) said it would exercise its option to acquire an additional 14 percent stake in Morgan Stanley Smith Barney Holdings LLC (MSSB) from Citigroup (NYSE:C), opening a 90 day window for both firms to settle on a price.
If the deal goes through, Morgan Stanley's stake in MSSB would increase to 65 percent from the current 51 percent. It seems unclear as to whether a full buy-in is still on the table, but it looks increasingly likely that the purchase process will be drawn out.
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"We see the MSSB acquisition as a substantial positive for MS, providing substantial operating efficiencies and additional deposit funding, and importantly, MS should be able to comfortably fund the purchase out of their liquidity pool," UBS analyst Brennan Hawken wrote in a note to clients.
For Citi, the acquisition eliminates a dollar-for-dollar capital reduction under Basel III, and the deal could be accretive to Citi's B3 ratio by about 15-20 basis points. However, the drawn out acquisition schedule removes a potential positive catalyst for both firms.
With the price to be finalized in three months, official updates are likely to be limited. If the prices submitted by each side differ by more than 10 percent, a third-party appraiser will help determine the final price.
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Meanwhile, Morgan Stanley got the right to take full control of the MSSB in installments between 2012 and 2014 after the brokerage joint venture was formed in June 2009 when Citigroup sold 51 percent of Smith Barney to Morgan Stanley for $2.7 billion in cash. Smith Barney, a former unit of Citi Global Wealth Management, was merged with Morgan Stanley's Global Wealth Management Group.
In September, 2009, Citigroup CEO Vikram Pandit had disclosed that they would eventually divest its entire 49 percent stake in the joint venture to partner Morgan Stanley.
Citigroup, which failed the Fed's stress test in March, has been selling assets and stakes in joint ventures to strengthen its balance sheet and Tier 1 capital ratio under new regulatory requirements.
On May 25, Citigroup said it has sold 10.1 percent stake in Akbank T.A.S. (Akbank) for about $1.15 billion, resulting in an aftertax loss of approximately $243 million in the second quarter. The transaction is estimated to generate approximately 23 basis points of Tier 1 Common capital under Basel III.