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Japan's Mitsubishi UFJ Takes 21% Stake in Morgan Stanley as Spain's Santander Moves on Sovereign

By , Money Morning •

By Jason Simpkins
Associate Editor

Morgan Stanley (MS) announced yesterday (Monday) that it closed its long-awaited deal with Mitsubishi UFJ Financial Group (ADR: MTU), giving Japan's largest financial group a 21% stake in the beleaguered U.S. investment bank.

Meanwhile, Sovereign Bancorp Inc. (SOV) confirmed last night that it has agreed to be bought out by Spain’s Banco Santander SA (ADR: STD) with regards to a possible buyout.

Mitsubishi UFJ first announced its intention to acquire a stake in Morgan Stanley on Sept. 22, but shares of the investment bank fell 60% last week as credit market turmoil and investor panic gripped the markets, putting the deal in jeopardy.

The deal was renegotiated yesterday after the U.S. government signaled over the weekend that it was prepared to protect Mitsubishi’s investment, the The Wall Street Journal reported.

In September, MUFG agreed to buy $6 billion in convertible shares and $3 billion of common shares in Morgan. But in accordance with the new deal, MUFG will receive $7.8 billion in preferred shares that convert to common stock at a price of $25.25.  That value was negotiated down from the previous level of $31.25. The remaining $1.2 billion will be paid out in non-convertible preferred stock. Both classes of stock pay a 10% dividend, which will give MUFG a $900 million annual payout.

Morgan Stanley’s shares closed yesterday at $18.10, up $8.42 each, or 86.98%.

The deal was “critical” for Morgan Stanley to hold onto its current credit ratings, Moody’s Investors Service (MCO) said in a statement last week. Moody’s put Morgan Stanley’s “A1” long-term debt rating under review for downgrade on Oct. 9.

Fitch Ratings yesterday cut its long-term issuer default rating on Morgan Stanley by two notches to "A", the sixth-highest investment grade. It also downgraded the long-term senior debt to "A" and the subordinated debt to "A-minus," or seventh-highest investment grade, Reuters reported.

The move reflects "continued expected challenges in profitability and funding despite the additional capital injection from Mitsubishi UFJ,” the agency said in a statement.

The ratings agency also said Morgan would face continued challenges during its transition from an investment bank to a financial holding company.

Santander Interested in Sovereign

Sovereign Bancorp Inc. late yesterday agreed to buy the 75.65% of Sovereign it didn’t already own for $1.9 billion in its own stock.

Santander, which acquired 25% of Sovereign by investing $2.9 billion in 2005 and 2006, The Journal reported, bought the rest of the bank after it was approached by a committee made up of Sovereign’s independent directors, the two financial institutions said.

Given its previous stake in Sovereign, a full-scale acquisition meshed well with the goals of Santander Chief Financial Officer Jose Antonio Alvarez, who earlier this year said his company could “add value by rescuing failing banks at attractive prices.”

Sovereign has seen its shares plummet nearly 80% in the past year. 

The deal between Sovereign and Santander is the latest evidence of widespread consolidation in the banking industry, and could hint at deals to come. As victim after victim has fallen to the credit crisis, stronger industry players have seized each opportunity to expand their businesses.

Last month, Bank of America Corp. (BAC) bought investment bank Merrill Lynch & Co. Soon thereafter JPMorgan Chase & Co. (JPM) – which had already scored big with a government-assisted takeover of The Bear Stearns Cos. – shelled out $1.9 billion for Washington Mutual Inc.’s deposits and assets.

Just last week Wells Fargo & Co. (WFC) and Citigroup Inc. (C) finally agreed to cease hostilities over Wachovia Corp. (WB). Wells Fargo won out and agreed to buy the Charlotte, N.C.-based bank for $11.7 billion in stock.

"I will say overall this will be a trend that continues at least through the first half of 2009 unless some of these names stabilize," Matthew Schultheis, senior analyst at Boenning & Scattergood Inc told the Mercury News. "It could even last beyond that."

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