Morgan Stanley (MS - Analyst Report) took another step in distancing itself from commodities operations by announcing the sale of its Global Oil Merchanting unit. The company has signed a deal with Russia-based Rosneft Oil Company’s wholly owned subsidiary to vend the unit.
The transaction includes Morgan Stanley’s international network of oil terminal storage deals, physical oil purchase, sale and supply agreements, inventory, equity investments and freight shipping contracts. Moreover, the company’s 49% stake in Heidmar Holdings LLC, which manages nearly 100 oil and chemical tankers, is part of the deal.
Notably, roughly 100 front-office employees including oil traders and shipping schedulers of Morgan Stanley’s Commodities division in the U.S., U.K. and Singapore will move to Rosneft, upon completion of the deal.
However, Morgan Stanley’s client-facilitation oil trading operation, its stake in TransMontaigne Partners LP and other commodities operations including gas and power trading, agriculture and metals are not part of the agreement. At present, the company is exploring strategic options for the sale of its stake in TransMontaigne.
Though the financial terms were not disclosed, the deal will expectedly close by the second half of next year. Additionally, it will not have any impact on Morgan Stanley’s financial performance. The agreement now awaits approval from the U.S., the E.U. and certain other jurisdictions.
With the Russian government owing nearly 70% of Rosneft, the deal could face regulatory hurdles. The U.S. has been often reluctant in allowing government-owned firms from countries such as Russia and China to purchase U.S. energy and infrastructure assets. Morgan Stanley will likely submit the sale for review by the U.S. Committee on Foreign Investment, an inter-agency executive panel which examines foreign investment for potential threats to national security.
Other than Morgan Stanley, many global banks including JPMorgan Chase & Co. (JPM - Analyst Report) , Deutsche Bank AG (DB - Analyst Report) and The Goldman Sachs Group, Inc. (GS - Analyst Report) are reducing their commodities operations. Once a lucrative sector, the commodity business is fast losing its shine. Intensification of regulatory and political scrutiny, higher capital costs and decline in profitability are the primary reasons making the business unfavorable for banks.
For Morgan Stanley, the sale will help in lowering its risk-weighted assets (RWAs) in the fixed-income and commodities division to less than $180 billion by 2016. As of Sep 30, 2013, RWAs in this division were $213 billion. The sale will likely further reduce RWAs by nearly $4 billion.
Currently, Morgan Stanley carries a Zacks Rank #3 (Hold).