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Morgan Stanley Gets Nod for JV Buyout

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Morgan Stanley’s (MS - Free Report) top priority to buy the remaining 35% stake in Morgan Stanley Wealth Management (MSWM) joint venture (JV) with Citigroup Inc. (C - Free Report) has finally received all regulatory approvals. The deal is expected to close by Jun 28.

Morgan Stanley is will be paying $4.7 billion in cash, as was previously agreed. In Sep 2012, the JV was valued at $13.5 billion.

The Background Story

When the financial crisis was at its worst, in Jun 2009, Morgan Stanley and Citigroup entered into an agreement to form the wealth management JV. The JV included 51% interest of Morgan Stanley's Global Wealth Management (GWM) Group, while Citigroup's Smith Barney, Quilter in the U.K., and Smith Barney Australia held the remaining stake.

Further, in September last year, Morgan Stanley purchased another 14% stake in the JV after receiving necessary regulatory approvals. Further, both the companies outlined steps that allowed Morgan Stanley to buy out the entire JV. Under the terms of the JV, the company was supposed to buy the remaining stake by Jun 1, 2015.

However, in order to stabilize its earnings and lower its dependence on volatile trading revenues, Morgan Stanley sought permission to fully buy the JV earlier than planned. Consequently, in Mar 2013, the company received the Federal Reserve’s consent for the same.

Impact of the Current Deal

Upon the closure of the deal, Morgan Stanley will record a one-time charge of $200 million on its capital in the current quarter. This reflects the difference between the purchase price for the 35% interest in the JV and its carrying value. Moreover, the company will redeem roughly $2.03 billion worth of preferred interests owned by Citigroup.

Additionally, the JV buyout will adversely impact Morgan Stanley’s second-quarter earnings, though, in the long run, this would free up additional capital that could be deployed meaningfully to enhance shareholder value. Further, following the closure, the deal will directly benefit the company’s revenues.

Going Forward

Wealth management business is deemed to be a stable revenue source as compared to other capital intensive operations. Morgan Stanley has been striving to boost it wealth management business. During the first quarter, the GWM Group accounted for nearly 43% of the company’s total revenue.

Earlier this month, Morgan Stanley stated that it aims to achieve a pre-tax profit margin ranging from 20–22% in its GWM Group by 2015. This is above the previously set target of 20%. It also anticipates pre-tax margin to rise to 23% or above, given the projected improvement in equity markets and rise in interest rates over the upcoming years.

In the last 2 quarters, the GWM Group has achieved pre-tax profit margin of 17%, higher than its target of 15%.

We believe that with the acquisition of the remaining stake in the JV, Morgan Stanley’s margins will get a further boost. Moreover, the company has been realigning its business strategy in order to primarily focus on wealth management operations (particularly outside the U.S.) which are expected to stabilize its earnings going forward.

Currently, Morgan Stanley carries a Zacks Rank #3 (Hold). Some better performing stocks include Investment JPMorgan Chase & Co. (JPM - Free Report) and The Goldman Sachs Group, Inc. (GS - Free Report) , both of which carry a Zacks Rank #2 (Buy).

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