Morgan Stanley and Citi have finally drawn a line

On Tuesday the situation around the sale of Citi's Smith Barney was finally clarified. The two companies Morgan Stanley and Citi made an announcement about their having reached a definitive agreement to combine Morgan Stanley's Global Wealth Management Group and Citi's Smith Barney, Quilter in the UK, and Smith Barney Australia into a new joint venture to be called Morgan Stanley Smith Barney. The new venture will not include Citi Private Bank or Nikko Cordial Securities.

The businesses combined into the joint venture have over 20,000 high-quality financial advisors, $1.7 trillion in client assets, $14.9 billion in pro-forma combined revenues, $2.8 billion in pro-forma combined pre-tax profit, 6.8 million client households globally – with a strong presence in the critically important high-net-worth client segment and more than 1,000 offices worldwide.

The terms of the agreement stipulate that Citi will exchange 100% of its Smith Barney, Smith Barney Australia and Quilter units for a 49% stake in the joint venture and an upfront cash payment of $2.7 billion. Morgan Stanley in turn will exchange 100% of its Global Wealth Management business for a 51% stake in the joint venture. After the third year of joint venture Morgan Stanley and Citi will have various purchase and sale rights for it with Citi still having an ownership of a significant stake in the joint venture at least through the fifth year.

Each of the companies will retain their deposits as of the close of the transaction. New deposits collected in the joint venture will be allocated based on ownership of the new company. The transaction approved by the Boards of Directors of both companies will expectedly close in the third quarter, subject to regulatory approvals and other customary closing conditions.