) top priority to buy the remaining 35% stake in Morgan Stanley
Wealth Management (MSWM) joint venture (JV) with
) has finally received all regulatory approvals. The deal is
expected to close by Jun 28.
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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
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.
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.
The Goldman Sachs Group, Inc.
), both of which carry a Zacks Rank #2 (Buy).