Morgan Stanley, Citigroup value brokerage at $13.5 bn

Transaction expected to lead to noncash charge against earnings for Citigroup, to reflect writedown of biz

Morgan Stanley has agreed to buy the rest of its brokerage joint venture from Citigroup Inc over time at a price that values the business at $13.5 billion, a victory for Morgan Stanley and far lower than the $22 billion that Citigroup had originally sought.

Under terms of the agreement, Morgan Stanley will buy another 14 percent of Morgan Stanley Smith Barney now, and will buy Citigroup's remaining 35 percent stake by June 1, 2015. The deal is subject to regulatory approval.

The transaction is expected to lead to a noncash charge against earnings for Citigroup, to reflect a writedown of the business. But it also removes a question mark for both banks, which agreed to the joint venture in 2009 in the wake of the financial crisis. Morgan Stanley, the majority owner of the business, had always expected to buy out Citigroup, but it was unclear how much it would have to pay.

"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," Citigroup Chief Executive Vikram Pandit said in a statement.

Morgan Stanley CEO James Gorman called the deal a "mutually beneficial agreement" that "gives both parties certainty and transparency on price and timing."

Both stocks rose on the news. In midmorning trading, Citigroup shares were up 2.5 percent at $32.62 and Morgan Stanley was up 1.7 percent at $16.90.

The two banks brought the matter to an independent arbitrator for an appraisal when they could not agree on a price. But the decision announced on Tuesday was made by the two banks and not the arbitrator, Perella Weinberg Partners, a source familiar with the matter said.

Wall Street had been awaiting the outcome not only to see if either side won, but to see what the decision might say about the future profitability of the brokerage industry.

Morgan Stanley's earlier $9 billion appraisal was generally seen as representing weak conditions while Citigroup's higher price was seen as promising a brighter future.

Citigroup's appraisal worked out to about 50 times current one-year earnings compared with Morgan Stanley's appraisal at 20 times.

Citigroup has been carrying its 49 percent stake at roughly $11 billion, and the agreement implies it is worth some $4 billion less than that. Citigroup had warned of the possibility of an accounting charge to adjust its balance sheet when it disclosed how much less Morgan Stanley said the brokerage was worth.