Citigroup Faces Multibillion Dollar Smith Barney Write-down
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Citigroup faces a potential multibillion dollar write-down on its minority equity stake in Morgan Stanley Smith Barney, an asset management business.
According to the Wall Street Journal, the venture between Citigroup and Morgan Stanley began in 2009, when the sides combined Citigroup’s Smith Barney with Morgan Stanley’s wealth-management unit.
Morgan Stanley has the right to start buying Citigroup out this spring and is expected to take full ownership in 2014.
Citigroup faces a potential multibillion dollar write-down on its minority equity stake in Morgan Stanley Smith Barney, an asset management business.
According to the Wall Street Journal, the venture between Citigroup and Morgan Stanley began in 2009, when the sides combined Citigroup’s Smith Barney with Morgan Stanley’s wealth-management unit.
Morgan Stanley has the right to start buying Citigroup out this spring and is expected to take full ownership in 2014.
However, due to different sets of accounting and valuation methodologies, Citigroup may incur a $2.5 billion write-down in the sale, leaving Citigroup with an after-tax earnings hit of as much as $1.8 billion.
Presently, Smith Barney is valued at $20 billion on Citigroup’s book, a calculation made by Howard Chen, an analyst with Credit Suisse. Morgan Stanley’s valuation is approximately $5 billion less.
At the time of the Smith Barney deal, Morgan Stanley was provided with options to buy-out Citigroup’s stake in the entity in three yearly stages beginning May 2012. And given Morgan Stanley’s need to stabilize its largely trading-driven revenues, it most likely will go ahead with the purchases – much to Citigroup’s concern.
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When the companies announced plans for the venture in January 2009, executives from both companies were optimistic about its growth prospects.
Morgan Stanley’s chief executive James Gorman back then sought to expand the brokerage business as part of a bid to build a safer Morgan Stanley after the 2008 financial crisis.
[quote] In 2009, Citigroup’s Vikram Pandit called it a “peerless global wealth management business.” [/quote]
Yet, Morgan Stanley Smith Barney’s assets under management have declined since 2009, losing $20 billion to $1.65 trillion in 2011.
At the same time, the venture’s pretax profit margin was only 10 percent at the end of 2011.
Jeff Harte, analyst with Sandler O’Neil + Partners commented:
[quote] Revenue, income and assets under management are all lower at Morgan Stanley Smith Barney today than when the two asset-management units were combined. If you’re looking at less income, it makes sense that the business is worth less. [/quote]Related News: Citigroup Pays US$285 Million To Settle Fraud Charges
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