UPDATE 1-Citi close to Morgan Stanley brokerage deal-sources

lunes 12 de enero de 2009 04:38 CET

(Recasts lead, adds deal details; paragraphs 10 to end)

By Megan Davies and Dan Wilchins

NEW YORK Jan 11 (Reuters) - Citigroup Inc (C.N: Cotización) was closer to a deal on Sunday to join its Smith Barney business with Morgan Stanley's brokerage operation (MS.N: Cotización) in a move that would create the world's largest retail brokerage.

The creation of the joint venture deal would lead to Morgan Stanley making a cash payment to Citi of about $2.5-$3 billion, a source familiar with the situation said.

The deal will also lead to Citi revaluing the unit as part of the bigger venture rather than a stand-alone business, leading to a gain of $5-$6 billion post-tax in tangible common equity, said the source, who asked not to be identified because the talks aren't public.

The cash would be a big boon for Citi, which is under tremendous pressure from the U.S. government to shore up its balance sheet after taking $45 billion of government capital in October and November.

Capital is crucial for the bank, which has posted more than $20.3 billion of net losses for the four quarters ended Sept 30.

Under the deal being discussed, Morgan Stanley would take a 51 percent stake in the venture and would also have options to increase that amount at a period of 3-6 years in the future, the source said.

The cash payment would allow Morgan Stanley -- which has a smaller brokerage business than Citi -- to take a controlling rather than a minority stake in the venture.   Continuación...