Morgan Stanley will purchase the rest of its brokerage joint venture from Citigroup Inc. at a price that values the total unit at $13.5 billion — or about 40 percent less than Citigroup's earlier estimate.
Morgan Stanley will pay $1.89 billion for a 14 percent stake this year, based on figures released in a statement from the New York-based banks today. By 2015, Morgan Stanley will buy the entire stake at the same valuation, the firms said.
Citigroup said in July it valued Morgan Stanley Smith Barney at about $22 billion, which was $13 billion more than Morgan Stanley's estimate. Citigroup has said it may need to take a charge if the price lowers the valuation on its balance sheet for its current 49 percent holding.
"Establishing certainty regarding the divestiture of this business is in the best interests of our shareholders," Citigroup Chief Executive Officer Vikram Pandit, 55, said in the statement. "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."
Citigroup's shares rose 1.7 percent to $32.37 at 10:04 a.m. in New York. Morgan Stanley climbed 2 percent to $16.94. Shannon Bell, a spokeswoman for Citigroup, didn't immediately respond to a message seeking comment on what charge the bank might take.
The two banks in 2009 formed the venture, with the most financial advisers of any brokerage, and Morgan Stanley paid $2.75 billion for a 51 percent stake and the right to buy the rest over time.
Morgan Stanley agreed to buy the next 15 percent piece of the brokerage by June and complete the purchase by June 2015. Morgan Stanley CEO James Gorman, 54, has said the purchase of the whole brokerage is key to his strategy of making the firm less reliant on trading revenue and improving profitability.
Morgan Stanley also received control of about $5.5 billion of deposits for no premium, according to today's statement. Morgan Stanley will have about $122 billion in deposits once it owns all of the venture, which will lower its funding costs and increase flexibility, David Russo, the firm's treasurer, said last month.
Citigroup estimated in a July 19 regulatory filing that its 49 percent stake was worth $11 billion and said Morgan Stanley's bid was 40 percent of that. Because the banks were more than 10 percent apart, they hired Perella Weinberg Partners LP as an outside appraiser. The banks said today that they reached an agreement that allows them to avoid repeating that process when selling additional stakes.
Under the terms of the original agreement, the gap between the banks' estimates was to be divided into thirds. If Perella's estimate fell in the middle portion, the transaction price was to be set at that level. If it were in the upper or lower third, the final price would be the average of Perella's estimate and the closest bank estimate, according to a procedure Morgan Stanley outlined in a May filing.
The brokerage, which is run by Morgan Stanley's Greg Fleming, is largely composed of the Smith Barney and Dean Witter businesses. Gorman said in June that he will change the name of the unit to Morgan Stanley Wealth Management.
The business, which had 16,934 financial advisers as of June 30, has struggled to make progress toward Gorman's goal of a 20 percent pretax profit margin. The unit hasn't topped 12 percent since the venture was formed.
Fleming last year laid out a plan to improve the margin to "mid-teens" by the middle of 2013. That included generating more revenue from deposits and lending, transaction services and increasing the amount of assets in fee-based accounts, as well as decreasing integration expenses.