MUFG seeks Morgan Stanley rejig; U.S. said to back deal

NEW YORK (Reuters) - Japan's Mitsubishi UFJ Financial Group is seeking more favorable terms for its plan to buy a stake in Morgan Stanley, a person briefed on the matter said, while newspapers reported that the U.S. government was ready to protect the Japanese investment.

Morgan Stanley's Frankfurt-listed shares jumped 58 percent on the news to 8.94 euros as expectations grew that a deal could come as early as Monday.

The Japanese lender will still buy a 21 percent stake from Morgan Stanley for $9 billion, but will amend the terms to include only convertible preferred shares and no common stock, the source said after the U.S. bank's share price plunged 58 percent last week.

Morgan Stanley is the latest stricken U.S. financial institution to seek refuge in a deal with a larger bank as the worsening credit crisis and accompanying market meltdown has narrowed the options of once stable banks and brokerages.

The Morgan Stanley news comes as Spain's Banco Santander SA was in advanced 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.

The sources declined to be identified because the transaction has not yet been announced.

The original terms included $6 billion in convertibles and $3 billion in common equity.

Exact details have not been disclosed, but the new terms will allow MUFG, Japan's largest bank, to buy preferred shares that will convert into common stock at a price range of $20 to $25, the source said. This was down from an initially negotiated price of $31.25 as Morgan Stanley's shares more than halved last week, reducing its market value to just $10.3 billion.

MUFG's move to seek convertible shares instead of all stock avoids a near-term loss, while still letting it benefit when the shares recover.

In the meantime, MUFG will also earn high-yielding 10 percent interest on the preferred shares.

As part of the MUFG deal, the company will also provide letters of credit and a credit line to support Morgan Stanley in a move that would reassure investors worried about the U.S. bank's liquidity.

The U.S. government will not invest alongside MUFG, the source said. The news comes as Britain moved to inject 37 billion pounds into three top banks in a deal that could make it their top shareholder.

The Wall Street Journal earlier reported that the government would express its support for the deal and work to structure any potential future investment in Morgan Stanley in a way that wouldn't wipe out MUFG's investment.

Separately, a New York Times report said federal officials assured MUFG late Sunday that its planned investment in the embattled Wall Street giant would be protected.

After two days of tense negotiations, Treasury officials urged a hesitant MUFG to proceed with its investment, the paper said on its Website, citing people involved in the talks.

Treasury officials could not be reached for comment.

Morgan Stanley, founded in 1935 by former executives of JPMorgan Chase & Co, was long one of Wall Street's pillars of strength, second among independent investment banks only to Goldman Sachs.

But it is battling a crisis of confidence and some suggest that it could be a test case for the U.S. government's new strategy of deploying its $700 billion bailout fund by buying equity stakes in banks.

(Additional reporting by Jui Chakravorty Das and Paritosh Bansal; Editing by Lincoln Feast and Andrew Callus)