By Joseph A. Giannone
NEW YORK (Reuters) - Mitsubishi UFJ Financial Group Inc (MUFG) completed its $9 billion investment in Morgan Stanley on Monday as U.S. government support helped nail down a critical deal many investors had feared could fall apart.
Morgan Stanley shares soared more than 75 percent after Japan's largest bank bought a 21 percent stake one day earlier than expected. Last week the New York bank's stock plunged by more than half amid fears that Morgan, forced to wait five days before completing the deal, might not survive the crisis.
"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 cash. Yet the entire investment now consists only of preferred shares, the banks said.
Previously, Mitsubishi had agreed to buy $3 billion of common stock at $31.25 a share, but the Japanese bank pushed for new terms after Morgan's stock plunged to $9.28. Morgan's total market value had fallen to $10.3 billion, and some customers were starting to lose confidence.
The U.S. government did not invest in Morgan Stanley, as had been speculated, but federal officials were involved in the talks and assured MUFG over the weekend that its investment would be protected, a person familiar with the matter said.
After two days of talks this weekend, Treasury officials urged a hesitant MUFG to proceed. The Japanese government and MUFG pressed Treasury to guarantee that if the United States were to inject money into Morgan, it would ensure that MUFG's investment would not be diluted, the source said.
Morgan Stanley stock was up 70.66 percent, or $6.84, at $16.52 in afternoon New York Stock Exchange trade after having reached $17.47 earlier in the day.
NEW DEAL
About $7.8 billion of MUFG'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 also has no maturity date.
Both preferred series pay a 10 percent interest rate, unchanged from the original pact.
"This investment further strengthens our capital position and gives us a powerful strategic partner going forward," Morgan Stanley Chief Executive John Mack told employees in a memo.
Morgan Stanley estimates it now has a Tier 1 capital ratio of 15.7 times and a gross leverage ratio below 20 times, considerably stronger than a year ago. Morgan also disclosed it reduced total assets by 9 percent to less than $900 billion since the end of August.
"We think these strong ratios and a strong partner in MUFG should lead to some stability in the client franchise and allay some fears in the credit markets," UBS brokerage analyst Glenn Schorr told clients.
Schorr stopped short of rating the stock "buy", citing erosion in Morgan's prime brokerage and derivatives businesses and the broader market weakness.
Morgan's investment deal is similar to one struck by Goldman Sachs Group Inc last month when it sold $5 billion in preferred shares paying 10 percent to Berkshire Hathaway, the holding company run by Warren Buffett. Goldman also sold $5 billion of stock in a public offering.
It was a tense week for Morgan Stanley, which had secured an agreement from MUFG two weeks ago and quickly received antitrust approval, but still had to wait five days before closing. During that period, the U.S. Securities and Exchange Commission also lifted its short-selling ban, adding more pressure on Morgan's stock.
MUFG delivered its 10-figure payment with a paper check because bank holidays in the United States and Japan precluded an electronic transfer, people familiar with the situation said.
PROTECTION AND PLANS
Mack and the CEOs of the largest U.S. banks were meeting with U.S. Treasury Secretary Henry Paulson on Monday to firm up details of a financial markets stabilization plan, which may include taking equity stakes in banks.
Earlier on Monday, British authorities moved to inject 37 billion pounds ($63 billion) into three UK banks, Royal Bank of Scotland Group Plc and the soon-to-be-merged HBOS Plc and Lloyds TSB Group Plc, in a deal that makes Britain the top shareholder in all three institutions.
For MUFG, owning convertible shares helps it avoid any immediate paper loss on the common stock, ensures a generous $900 million in interest payments per year, and lets MUFG benefit from a recovery in Morgan Stanley.
Morgan Stanley officials stressed that the deal creates a strategic partnership that will fortify the bank and blaze new business opportunities worldwide, such as asset management and corporate banking.
"MUFG and Morgan Stanley are working toward numerous areas of collaboration, including pursuing a lending relationship," Mack wrote.
MUFG also will bolster the market's shaken confidence in Morgan Stanley by providing letters of credit and credit lines. Last month Morgan became a bank holding company, and its links to MUFG will help it expand its deposit-gathering business.
The deal serves as an endorsement of Morgan Stanley, critical at a time when investors are worried that even the largest banks lack the cash and capital to survive the current worst financial crisis.
In related news, Spain's Banco Santander SA was in talks on Monday to buy full control of U.S. regional bank Sovereign Bancorp Inc for $2.5 billion, a source familiar with that matter said.
(Additional reporting by Jui Chakravorty Das, Paritosh Bansal and Ellis Mnyandu; editing by Lincoln Feast, Andrew Callus, Jeffrey Benkoe and Susan Kelly)