Citi (C) Faces Multi-Billion Dollar Loss on Smith Barney Sale (MS)
Down)
Citi (NYSE: C) shares are indicated for a lower open Wednesday following reports the bank might have to take a massive write-down on Smith Barney.
Starting in a few months, Morgan Stanley (NYSE: MS) will have the ability to buy Citi out of its Smith Barney joint venture, formed in 2009 through the combination of Citi's Smith Barney and Morgan Stanley's wealth-management unit.
One analyst from Credit Suisse said the unit is sitting with a $20 billion valuation on Citi's books. The number is about $5 billion more than what Morgan Stanley thinks Smith Barney is worth.
But those could also be adjusted as the sour economy has made it tougher for the branch to gather new assets. As holder of a purchase option, Morgan Stanley has all the incentive in the world to present lower numbers in a potential acquisition. Should Morgan Stanley grab Smith Barney at a discount, that could translate to a $1.8 billion post-tax hit...more than Citi earned last quarter.
Here's how that happens: with Morgan Stanley valuing Smith Barney at 25 percent less, Citi's 50 percent stake falls to a value of $7.5 billion. Citi writing down $2.5 billion following the transaction would mean an after-tax hit of $1.8 billion, based on a 28 percent corporate tax rate.
The initial deal would shift Morgan Stanley's stake from 51 percent up to 65 percent, while's Citi's position will move to 35 percent. Morgan Stanley also has options to acquire larger portions of the company in coming years.
Citi shares are over 1 percent lower while shares of Morgan Stanley are off about 0.5 percent early Wednesday.
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Starting in a few months, Morgan Stanley (NYSE: MS) will have the ability to buy Citi out of its Smith Barney joint venture, formed in 2009 through the combination of Citi's Smith Barney and Morgan Stanley's wealth-management unit.
One analyst from Credit Suisse said the unit is sitting with a $20 billion valuation on Citi's books. The number is about $5 billion more than what Morgan Stanley thinks Smith Barney is worth.
But those could also be adjusted as the sour economy has made it tougher for the branch to gather new assets. As holder of a purchase option, Morgan Stanley has all the incentive in the world to present lower numbers in a potential acquisition. Should Morgan Stanley grab Smith Barney at a discount, that could translate to a $1.8 billion post-tax hit...more than Citi earned last quarter.
Here's how that happens: with Morgan Stanley valuing Smith Barney at 25 percent less, Citi's 50 percent stake falls to a value of $7.5 billion. Citi writing down $2.5 billion following the transaction would mean an after-tax hit of $1.8 billion, based on a 28 percent corporate tax rate.
The initial deal would shift Morgan Stanley's stake from 51 percent up to 65 percent, while's Citi's position will move to 35 percent. Morgan Stanley also has options to acquire larger portions of the company in coming years.
Citi shares are over 1 percent lower while shares of Morgan Stanley are off about 0.5 percent early Wednesday.
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