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A man walks into the Morgan Stanley offices in New York January 18, 2012. (SHANNON STAPLETON/REUTERS)
A man walks into the Morgan Stanley offices in New York January 18, 2012. (SHANNON STAPLETON/REUTERS)

Morgan Stanley deal values Smith Barney at $13.5-billion (U.S.) Add to ...

Morgan Stanley and Citigroup have agreed on a $13.5-billion (U.S.) valuation for their retail brokerage joint venture, ending a drawn-out disagreement between the two banks and likely forcing Citi to take a capital charge on the business.

The banks said on Tuesday that they had reached an agreement on the valuation of the entire business, as well as an agreement for Morgan Stanley to buy the remaining 35 per cent stake of Citi’s stake in Smith Barney by June of 2015.

The transaction ends three-months of wrangling between the banks over the value of the retail brokerage joint venture, with Citi valuing the business at about $22.5-billion and Morgan Stanley calculating that it was worth just $9-billion.

Morgan Stanley will now pay $1.89-billion for a 14 per cent stake.

This will boost Morgan Stanley’s ownership of Smith Barney to 65 per cent, before it buys the next 15 per cent by June of next year. Taking control of the brokerage is a key plank in Morgan Stanley’s attempt to wean itself from more volatile investment banking income in the wake of the financial crisis.

“This mutually beneficial agreement gives both parties certainty and transparency on price and timing, and is a significant milestone for Morgan Stanley in the implementation of our strategy,” James Gorman, chief executive, said in a statement.

Citi has been selling off non-core assets since the crisis, but will likely have to take a charge because of the new valuation of the Smith Barney business, analysts have said.

“Establishing certainty regarding the divestiture of this business is in the best interests of our shareholders,” Citi chief executive Vikram Pandit said in the statement. “As we have shown, the more we put the past behind us, the more we can focus on our future, which is in the core businesses in Citicorp.”

Previous regulatory filings indicated that Morgan Stanley had valued the business at about $9bn, compared with the valuation of about $22.5bn from Citi. Analysts said that much of the price discrepency was due to “game theory” being played by the banks and they expected a valuation from Perella Weinberg - the independent adjudicator they hired - to come in the middle of the range.

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