Mitsubishi and Morgan Stanley Renegotiating Mitsubishi Equity Purchase

Oh, just when it might be looking safe to go into the pool again, by virtue of the EU putting up a substantial enough plan to possibly start calming overfrayed nerves, another source of worry appears to be deteriorating, namely Morgan Stanley.

Sports fans may recall that a badly-needed cash injection into the embattled investment bank by Japanese bank Mitsubishi UFJ was due to close Tuesday. However, the deal had come to look like a complete turkey from the Japanese side, since their investment of $9 billion, which at the time of announcement amounted to 21% of the company, now contrasts with a market cap of just over $10 billion.

The good news is that Mitsubishi does not appear to be attempting to reduce the size of the investment but securing better terms, namely, a deal consisting entirely of preferred stock. But if the revised deal does not close Tuesday, anxiety about Morgan Stanley could escalate, with not-pretty side effects. This is high stakes poker indeed.

From the New York Times (hat tip reader Tim):

Morgan Stanley was racing to salvage a crucial investment from a big Japanese bank on Sunday in an effort to allay growing fears about its future — negotiations so critical to the financial markets that they have drawn in both the Treasury Department and the Japanese government.

Morgan Stanley, one of the most storied names on Wall Street, was locked in talks on Sunday to renegotiate its planned $9 billion investment from the Mitsubishi UFJ Financial Group of Japan, according to people involved in the talks.

The completion of a deal might help calm markets worldwide, which sank last week because of escalating concerns about the fate of financial institutions like Morgan Stanley. Investors might read the investment as a sign of confidence in the bank’s future.

Mitsubishi was pressing for more favorable terms after Morgan Stanley lost nearly half its market value during last week’s stock market plunge.

Treasury, however, is not planning to have the United States government take a direct stake in Morgan Stanley as part of a broader effort to stabilize the financial industry and the markets, these people said. Wall Street had buzzed Friday that such a move might be unavoidable.

Morgan Stanley is in the midst of the gravest crisis in its 74-year history, even though analysts estimate that the bank has more than $100 billion in capital. Morgan Stanley’s shares price has plunged nearly 82 percent this year, closing at $9.68 on Friday.

Last month, Mitsubishi agreed buy about 21 percent of Morgan Stanley. The investment was to be made in the form of $3 billion in common stock, at $25.35 a share, as well as $6 billion in convertible preferred stock with a 10 percent dividend and a conversion price of $31.25 a share.

Under the proposed new terms being discussed on Sunday, Mitsubishi would still buy roughly 21 percent of Morgan Stanley, these people said. But all of the investment would be through preferred shares, with a 10 percent annual dividend. Many of those shares would be convertible into common stock, but the Japanese bank was trying to set a conversion price far lower than originally proposed.

Morgan Stanley and Mitsubishi have been in constant contact with government officials this weekend, these people said.

Mitsubishi and the Japanese government have sought assurances from the Treasury Department that if the United States were to decide to inject money into Morgan Stanley at a later time — a possibility some analysts do not rule out — that such a move would not wipe out preferred shareholders. The Treasurey has indicated that it might use some of the $700 billion bailout package to take direct stakes in banks, but it has not spelled out how it would do so.

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  1. Anonymous

    Warren buffet’s terms are now the “floor” entry point
    to bail out distressed IB’s. 10% dividend, plus conversion option. Only question is if Mitsubishi gets an exit via a buyout premium, as with Goldman, or a
    put of some kind. They certainly need protection against becoming subordinate to US Treasury.

  2. Owner Earnings

    Lehmans book value turned out to be NEGATIVE 100 BILLION according to the current value of Lehmans bonds.

    Morgan Stanley’s can’t be far behind.

  3. Anonymous

    Strange that US futures are up 3-4% in early Sunday evening trading.

    Not bothered by the G7’s ‘damp squib’? Well, how about the Mitsubishi capital injection into MS falling through?

    Sell this pop. Here be monsters.

  4. doc holiday

    Re: "a deal consisting entirely of preferred stock"

    >> Good for them, I hope they cut a much better deal and show people the process of re-negotiation and leverage, in an arms length transaction. If the deal is filled with trash, keep going lower and get some blood from that crooked and twisted turnip — then make it squeal!

  5. Anonymous

    Doc, you sure do hate investment banks. Any reason for that? It’s making you look a little silly, frankly.

  6. tompain

    Finally, some sign of recognition from Treasury that equity investors will not pony up as long as the government continues to leave open the possibility that it will choose to wipe the equity out arbitrarily at some later date. Now, if only other potential suppliers of equity capital can get the same assurances that Mitsubishi is getting, private capital could begin to flow in to the financial sector, instead of waiting on the sidelines as it has done since the GSE debacle. One hopes that we will not continue to require deal-by-deal negotiations with the government, as has been required in the cases of WM and WB and now MS.

  7. Anonymous

    9:02 PM, it’s you and not Doc that is out of touch. did you read the media reaction to Dick Fuld’s performance before Congress?

    A buddy of mine, quite savvy (bought his first stock at age of 11, has done well in the markets, successful real estate investor and attorney, former general counsel of a public company and also worked as in-house counsel of a major PE firm, now in private practice at a big firm you heard of doing intellectual property and deal work) would regularly sputter at least two years before the blow up about how the crooks on Wall Street were destroying the real economy. This is from someone who had a seat at the table from time to time (and is a superb negotiator, so this isn’t personal sour grapes).

    I think a lot of people share Doc’s views, they are just less forward about them.

  8. Anonymous

    Mitsubishi should pull out of the deal and let them go under, then pick up the pieces they need. They are getting fleeced by MS.

  9. Anonymous


    I stopped reading as soon as you asked me about the media’s reaction, as though that was something to pay attention to.

  10. Anonymous

    Strange that US futures are up 3-4%in early Sunday evening trading…Sell this pop. Here be monsters.

    Why strange?

    U-R right. Shorts covering from sellers under margin calls is not any kind of rally.

  11. fredw

    Well , how can the still invest 9 billion into a 10 billion company and only have a 21 percent ownership stake ? Does this mean they only plan to invest 2 billion now ? If yes , how could that be a positive for MS ? If they were to spend 9 billion for the preferred and only take a 21 percent stake , one would assume their own stock would plunge and for good reason….

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