Morgan Stanley Moves to Increase Stake in Smith Barney

Morgan Stanley will buy another 14 percent of joint venture Morgan Stanley Smith Barney, starting what could become a negotiation to purchase the rest of the retail brokerage from Citi.

Morgan Stanley said it would buy another 14 percent of joint venture Morgan Stanley Smith Barney, starting what sources have said could become a negotiation to purchase the rest of Citigroup Inc's 49 percent stake in the retail brokerage.

The two parties will seek a fair price for the 14 percent stake, which Morgan Stanley has an option to buy this year. But because the banks will already be discussing a value for the business, Morgan Stanley may press Citigroup to sell its entire stake now, people familiar with the matter have said.

In the past, analysts have estimated the 49 percent stake could be worth about $10 billion, but those appraisals can change quickly as markets tank and the outlook for the retail brokerage business sours.

Morgan Stanley now owns 51 percent of the joint venture, and Citigroup has said it ultimately intends to dispose of its share.

Both banks believe the other will be negotiating with a greater need to complete the deal, people familiar with the two sides have said.

Citigroup needs to continue disposing of its stake in the venture, as well as other assets outside of its main businesses, particularly after the U.S. Federal Reserve rejected its capital plans in March.

Morgan Stanley, on the other hand, needs the additional income from the percentage of the venture it does not own. The company said its capital plan, which the Federal Reserve approved in March, included the potential of buying the 14 percent stake.

In a statement issued following Morgan Stanley's announcement, Citigroup highlighted what it called its "enormous progress" in reducing other noncore assets aside from the brokerage stake. The "Citi Holdings" unit in which the company holds the stake is down to about one-fourth of its 2008 size, the company said.

Morgan Stanley said in its statement Thursday that it did not intend to make further comments on the deal until a price is set.

Morgan Stanley and Citigroup set up a joint venture for retail brokerage in 2009. Morgan Stanley took a controlling stake in the venture and received options to buy out Citigroup's stake over time.

Shares of Citigroup were up 0.4 percent at $26.11 in morning trading, while Morgan Stanley was down 0.7 percent at $13.00. (Reporting by David Henry in New York; Editing by Gerald E. McCormick and Lisa Von Ahn)