Morgan Stanley (NYSE:MS), the global financial services giant, was in talks with Qatar Investment Authority (QIA), a Qatari sovereign wealth fund, over the sale of MS commodities division, CNBC reported on Friday. The talks are in the advanced stage and it is widely believed that a deal might be imminent soon.
If an agreement is reached between the two parties, this could mean a substantial foundation for the Qatari fund in the commodity trading business. MS has long been a market leader in the energy and metals trading and an acquisition of such magnitude, even in the form of a minority stake in MS, could put Qatar at the center of the oil, gas, metals trading.
Recent reports from Morgan Stanley (NYSE:MS) regarding the profitability of its asset management business have been less optimistic than usual. On Thursday, Morgan reported a 24% drop in revenue for Q2. Analysts forecasts of 43 cents a share earnings widely missed the reported earnings of 29 cents a share.
This was a direct consequence of the events of last month concerning the bank’s credit rating downgrade. In late June, MS faced the biggest setback when Moody’s Corporation (NYSE:MCO)’s cut its rating by two notches. This caused significant decline in the volume of Morgan’s bond, currency and commodity trading business of in Q2.
The deal could provide MS with the influx of capital it desperately needs at this time. New upcoming regulations on the commodity business including the Volcker rule and the Dodd-Frank Act could also diminish the profitability of the unit under consideration. Morgan is better off selling it off at present before the regulations take effect.
Despite the recent market pessimism about MS, a minority share in Morgan’s commodities trading unit could cost the Qatari fund a billion dollars or more, says CNBC. Morgan’s commodity trading unit has remained profitable even in the turbulent trading times and has historically made $2-3 billion a year.
Qatar’s goal is to become a major international center for finance and investment management, a vision shared by its government, people and institutions, says QIA. In February, QIA acquired Credit Suisse Group AG (ADR) (NYSE:CS)’s headquarters in London and now holds 6% stake in Credit Suisse. It also has stakes in Volkswagen, Siemens, Barclays and Tiffany.
The QIA has exhibited a keen eagerness to enter the commodities business. Last month, talks of a merger between Xstrata, a mining company, and Glencore International, a Swiss trading giant, resulted in a $26 billion price placed on Xstrata.
The QIA demanded higher shares in Glencore in exchange for its 34% share in Xstrata. Glencore is offering 2.8 new shares for every Xstrata share held while Qatar is demanding a ratio of 3.25.
Both parties are sticking to their guns and a compromise has not yet been reached. It is widely believed, however, that a settlement will eventually materialize with both parties yielding a little to accommodate the demands of the other.
The impasse situation on the Glencore deal and the demand for a majority share in Morgan Stanley’s commodity unit has indicated to the world that Qatar is serious about its goal of expanding across asset classes and geographical regions. According to CNBC, QIA’s assets under management are $85 billion currently and the current scenario indicates that Qatar intends to go a long way in the international financial markets.