Qatar in talks to buy Morgan Stanley unit stake

Qatar's sovereign wealth fund said to be keen on company's commodities trading division
Qatar in talks to buy Morgan Stanley unit stake
By Reuters
Sat 21 Jul 2012 10:01 AM

Morgan Stanley is in advanced talks over selling a stake in its multibillion-dollar commodities trading division to Qatar's sovereign wealth fund, CNBC reported on Friday, citing people familiar with the matter.

Talks have recently focused on the Qatar Investment Authority buying a minority stake, according to one of the people, CNBC reported on its website. It said a deal might be imminent, but cautioned the exact terms could not be determined and that discussions could still fall apart.

A Morgan Stanley spokeswoman declined to comment.

Morgan Stanley, whose commodity unit was one of the original "Wall Street refiners" that pioneered the energy derivatives market two decades ago, was first reported to be considering selling a stake a month ago. Earlier it was believed to be in talks with private equity funds, including Blackstone Group.

QIA, which controls an investment fund of over $100bn, has emerged as a leading investor in the raw materials sector. It has deals ranging from a major stake in London-listed miner Xstrata Plc - the subject of a bid from Glencore International Plc, which competes with Morgan Stanley - to a small private equity vehicle together with British bank Barclays Plc.

The commodities unit at Morgan has earned the bank an estimated $17bn in revenue over the past decade, trading both financial contracts and physical commodities such as gasoline and diesel fuel. CNBC said owning part of the unit could "cost the Qatari fund a billion dollars or more," without providing a source for the sum.

But with a deepening role in illiquid cash markets and physical assets through subsidiaries TransMontaigne Inc and Heidmar Inc, Morgan's division has also become a weight on the bank's capital base as it faces credit pressures. And new regulations threaten to limit its advantage in trading physical commodities, long its strong suit.

Speaking earlier this week to CNBC, Morgan's chief financial officer, Ruth Porat, said they "look at commodities as an ongoing" business, but could "never say never" about outside investment, the business news station reported.

Enlisting a cash-rich investor to help buoy a commodity trading division would be unusual on Wall Street, although there is some precedent for joint ventures.

Louis Dreyfus Highbridge, an energy merchant owned by the French commodity trader and a JP Morgan investment group, has existed for years. More recently a handful of Sempra Commodities veterans secured the backing of a private equity fund in order to launch a new venture called Freepoint Commodities.

There are signs that Morgan's competitive position is slipping, with its division apparently suffering more than its rivals from weaker trading volumes, as well as new regulations that will limit US banks' trading for their own account and might force them to divest commodity assets.

Morgan Stanley fell to fourth place in the over-the-counter market for commodity derivatives among corporations and investors, behind JPMorgan Chase & Co, Goldman Sachs Group Inc and Barclays Plc, according to a recent survey by Greenwich Associates.

The bank has increased its trading risk this year even as many of its peers cut back. Morgan Stanley's second-quarter value-at-risk in commodities, a measure of its estimated maximum loss on 95 out of 100 trading days, rose to an average of $34m, the highest since just before the 2008 financial crisis. Goldman Sachs cut its VaR to an eight-year low.

Morgan Stanley said its overall net revenue for fixed income and commodities sales and trading slumped to $770m during the second quarter from $1.9bn a year ago. It reports commodity-specific revenues only annually.

For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.

Subscribe to our Newsletter

Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.