Morgan Stanley wants all of Citi Group venture-sources

NEW YORK, Fri Mar 23, 2012 – Morgan Stanley is interested in buying all of Citigroup Inc’s. stake in their wealth management joint venture this year in what could be a roughly $10 billion deal, said people familiar with Morgan Stanley management’s thinking.

Under the terms of the Morgan Stanley Smith Barney joint venture, Morgan Stanley will get an option starting May 31 to buy 14 percent more of the business from Citigroup, adding to the 51 percent stake it already has. It has options to buy the remaining portion in two more chunks through May 2014.

But both sides are beginning to suggest they would be interested in doing a deal for Citigroup’s entire 49 percent stake now instead of waiting for two more years, and have started behind-the-scenes posturing to negotiate.

Morgan Stanley and Citigroup spokespersons declined to comment on the potential for an accelerated deal.

Citigroup is carrying its stake in Morgan Stanley Smith Barney at a $21 billion valuation, while Morgan Stanley is carrying its stake at just shy of a $20 billion valuation. That means the 49 percent stake was worth $10.3 billion or $9.7 billion, respectively, as of Dec. 31.

While that might not be a large gap, investment bankers and analysts said Morgan Stanley is likely to come in with an initial lowball offer in the range of $15 billion, while Citigroup is likely to counter with a value of around $23 billion.

From Morgan Stanley’s point of view, Citigroup’s need to raise capital, as well as weak earnings and soft valuations for financial firms, should make it an eager seller.

The U.S. Federal Reserve this month denied Citigroup’s request to raise dividends after the bank failed its stress test. Citigroup is submitting a revised plan, which would either require a more modest dividend request or more capital. Selling its entire stake in Morgan Stanley Smith Barney would give it more flexibility to pay higher dividends.