According to sources, on Monday, Morgan Stanley (MS) took the final decision to sell its 34.3% stake in one of the biggest Chinese investment banks, China International Capital Corp. (CICC). Morgan Stanley has been trying to strike the deal for the last couple of years.
The company had acquired the stake in CICC 15 years back for a mere $37 million. Amid the current economic recovery, Morgan Stanley has now found two US private equity firms ─ Kohlberg Kravis Roberts & Co. and TPG Capital LLP ─ as bidders for a deal of about $1 billion. The company is expected to earn a modest gain out of the deal. However, the deal awaits approval from the Chinese government.
Morgan Stanley wants to get rid of the ownership in CICC due to severe local control issues that prevent the company from exercising control over management’s decision. Additionally, the internal policies of China restrict a foreign investment company to a one-third stake in a Chinese firm.
Hence, these limitations have forced Morgan Stanley to vend its ownership in CICC for a new joint venture with China Fortune Securities Co., a Chinese brokerage. This new joint venture will grant Morgan Stanley the right to trade stocks and other securities on local Chinese markets.
The US firm had initially joined CICC with the aim to capitalize on the growing Chinese economy. Morgan Stanley had signed an initial agreement in 2007 to take a one-third stake in China Fortune Securities. However, regulators refused to complete that venture partly because Morgan Stanley owns a stake in CICC, which explains the company’s urgency to relieve itself of the CICC stake.
Additionally, the new joint venture is crucial for Morgan Stanley since competitors such as Goldman Sachs Group Inc. (GS) and UBS AG (UBS) are already capitalizing on China’s growing domestic market by running their own securities joint ventures in China.
While the deal provides Morgan Stanley more scope and independence to enhance its growth prospects in China through a more liberal joint venture, its stake in CICC would be profitable for the buyers as well. The purchase of stake will profit any buyer with a healthy dividend income, an association with one of the country’s esteemed and most powerful securities firms and possible co-investment opportunities.
On Monday, the shares of Morgan Stanley closed at $27.71, up 1.1%, on New York Stock Exchange.
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