Mitsubishi UFJ Financial Group Inc (MUFG) completed its purchase of a stake in Morgan Stanley on Monday with U.S. government support, helping close a deal that investors had feared would fall apart.
Morgan Stanley shares soared as much as 65 percent after Japan's largest bank bought the stake — a day earlier than expected — after a week in which the New York bank's stock plunging by more than half on fears Morgan Stanley might not survive.
"It's different terms, but it's done, and I think people should breathe a sigh of relief that it's done," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
Amending the terms of a September 29 agreement, Mitsubishi bought preferred stock convertible into a 21 percent stake in Morgan for $9 billion in cash, with the entire investment now consisting only of preferred stock, the Japanese bank said.
Previously, $3 billion of the stake was to be in common stock purchased for $31.25 a share, but Mitsubishi pushed for new terms after Morgan Stanley stock plunged 58 percent last week to $9.28 and eroded its total market value to just $10.3 billion.
While the U.S. government is not investing in Morgan Stanley, as had been speculated, U.S. officials assured MUFG over the weekend that its investment in Morgan Stanley would be protected, a person familiar with the matter said.
After two days of tense negotiations this weekend, Treasury officials urged a hesitant MUFG to proceed.
The Japanese government and MUFG pressed the Treasury to guarantee that if the United States were to put in money into Morgan Stanley it would be done in a way that MUFG's investment would not be wiped out, the source said.
Morgan Stanley stock jumped as high as $15.99 on the New York Stock Exchange before easing to $14.91, up 54 percent.
NEW DEAL
About $7.8 billion of Mitsubishi's investment was in preferred shares with a conversion price of $25.25 a common share and with no maturity date. The other $1.2 billion is in preferred stock that is not convertible and with no maturity date.
Both preferred series pay a 10 percent interest rate. In that regard, the deal is similar to Goldman Sachs Group Inc's sale of $5 billion in preferred shares to Berkshire Hathaway Inc, the holding company controlled by billionaire investor Warren Buffett.
The banks completed the deal Monday, a bank holiday in both the U.S. and Japan. A source familiar with the situation said MUFG's payment was made with a paper check.
MUFG retains the right to maintain a 20 percent stake in Morgan Stanley and, providing that its stake remains above 10 percent, the right to one seat on Morgan Stanley's board of directors.
The Morgan Stanley deal came as Spain's Banco Santander SA was in talks to buy full control of Sovereign Bancorp Inc in a deal valued at $2.5 billion, according to another source familiar with the matter.
PROTECTION AND PLANS
MUFG's decision to seek convertible shares helps the Japanese bank avoid any immediate paper loss on the common stock and ensures a generous $900 million in interest payments per year. It would also let MUFG benefit from a recovery in Morgan Stanley's prospects.
Morgan Stanley's outlook has improved dramatically now that the deal has closed. MUFG intends to protect its investment, providing letters of credit and credit lines to bolster Morgan Stanley's trading and prime brokerage businesses.
That is key in a period during which investors are worried that banks lack cash and capital to get through what could be the worst financial crisis since the Great Depression.
Contrary to speculation, the U.S. government did not make a direct investment in Morgan Stanley. By comparison, British authorities moved to inject 37 billion pounds into three U.K. banks in a deal that makes it the top shareholder in all three institutions.
Morgan Stanley, founded in 1935 by former executives of J.P. Morgan & Co, was long a Wall Street pillar. In recent years, it was second only to Goldman Sachs among independent investment banks .
