Morgan Stanley, Qatari Fund May Do Commodities Deal

Morgan Stanley officials are in advanced talks with a Middle Eastern sovereign-wealth fund, the Qatar Investment Authority, about an investment in the bank's commodities unit, say several people familiar with the matter, and a deal could be imminent.

Morgan Stanley
Oliver P. Quillia for
Morgan Stanley

Such a sake could give the Qatari fund a toehold in the robust global business of trading paper and physical stocks of commodities like crude oil, natural gas, and metals, while at the same time providing an influx of capital for Morgan Stanley.

Talks between the two entities have in recent days centered on the notion of the QIA purchasing a minority stake in Morgan’s commodities business, according to one of the people familiar with the matter. One current concern, according to another person familiar with the matter: making sure that the most talented traders in the division are contractually obligated to stay on board.

Owning part of Morgan’s commodities trading unit could cost the Qatari fund a billion dollars or more. Even though the second quarter generated relatively low revenue amid spiraling crude-oil prices, among other factors, the bank's commodities division has historically made between $2 billion and $3 billion per year, people with knowledge of the business have said. The unit also includes significant physical assets, including TransMontaigne Inc., a Denver-based commodities logistics company, which could sweeten the price even during this turbulent trading period.

Still, the exact terms of the potential deal could not immediately be determined. And the people familiar with the matter cautioned that the discussions could yet fall apart. A spokesman for Morgan Stanley declined to comment on the possibility of a sale, and representatives for the Qatari sovereign-wealth fund did not respond to requests for comment.

During an interview with CNBC on Wednesday to discuss her firm’s second-quarter earnings, Morgan Stanley chief financial officer Ruth Porat said that while “we look at commodities as an ongoing” business, “never say never” when it comes to handicapping an eventual sale or outside investment in the unit.

A deal inked this summer would come at a sensitive time for Morgan Stanley, which has recently been subjected to a corporate-credit downgrade by one major ratings agency, a resultant hike in its borrowing costs, and a tough financial quarter in which revenue in key businesses, like fixed income and banking, plummeted. Net income for the second quarter dropped 54 percent, to $563 million, and revenue fell 24 percent to $6.95 billion. In the aftermath of those results, Morgan Stanley shares were hammered, dropping more than 5 percent on Wednesday.

Longer-term, Morgan also faces a raft of new regulations that could hamper its ability to make money in key businesses — including commodities. The Volcker rule, for instance, a portion of the Dodd-Frank Act whose parameters are still being shaped, could curb the firm’s ability to buy and sell commodities profitably. Against that backdrop, selling all or most of its commodities business to an overseas investor not privy to such regulations could prove an attractive option.

The Qatari fund was at one point interested in the possibility of a larger stake in Morgan’s commodities business, said someone familiar with the matter, but Morgan officials are loathe to sell off more than a minority interest, according to another one of the people with knowledge of the talks.

Founded in 2005, the Qatar Investment Authority, which is owned by the state, was set up to diversify the country’s investments across different asset classes and geographies, according to its web site. Its assets under management are $85 billion, according to figures compiled by Factset.

The QIA has a variety of investments in Europe and the U.S., including stakes in Volkswagen, Siemens, Barclays, and Tiffany . The sovereign-wealth fund made waves last month for demanding that the mining company Xstrata, of which the QIA is the second-largest shareholder, hold out for a higher bid from Glencore International, the Swiss trading company that is trying to purchase it.

-By CNBC's Kate Kelly, with reporting by Mary Thompson
@KateKellyCNBC& @MThompsonCNBC