Peter Foley/Bloomberg News
- Christian BerthelsenThe Wall Street JournalCANCEL
- Justin BaerThe Wall Street JournalCANCEL
Updated April 14, 2015 7:23 p.m. ET
is nearing a deal to sell its oil-trading and storage business, potentially bringing to a close the bank’s lengthy effort to jettison the unit.
Trading firm Castleton Commodities International LLC has emerged as the leading bidder and is offering more than $1 billion for the business, according to people familiar with the situation. Castleton’s backers include hedge-fund heavyweights Glenn Dubin and Paul Tudor Jones.
Morgan Stanley and Castleton are still in discussions, and any deal—if one is struck—is still weeks away. The New York bank has attempted twice before to unload the business, first in 2012, when it couldn’t agree on terms with Qatar’s sovereign-wealth fund, and then in 2014, when an agreement with Russian oil company Rosneft OAO unraveled amid tensions over Moscow’s intervention in Ukraine.
Wall Street banks are shedding their physical-commodity operations amid a slump in raw-materials prices and pressure from regulators and politicians. The Federal Reserve has expressed concerns that the dangers associated with producing and transporting commodities pose a systemic risk to the financial system.
Officials say incidents such as the BP PLC Deepwater Horizon explosion in the Gulf of Mexico could saddle banks active in the sector with destabilizing liabilities.
Taking the place of big banks are privately held commodity-trading firms that operate across borders and face less regulatory scrutiny and lighter disclosure requirements. A sale to Castleton would reinforce this trend.
Morgan Stanley Chief Executive James Gorman has told the bank’s board that selling the oil business remains a priority for 2015, people familiar with the matter said.
The deal is an important part of his strategy to shrink the portion of the firm’s balance sheet tied to debt, currency and commodities trading to less than $180 billion by year-end.
The issue has been a key focus during quarterly earnings conference calls with analysts. Morgan Stanley reports first-quarter results Monday.
The bank has remained active in physical commodities trading during the sale process. This year, the bank has leased almost two dozen tankers to haul more than a million barrels of refined-fuel products around the world, with the U.S. Gulf Coast and Atlantic Coast frequent destinations, according to records available from data provider Reuters.
Morgan Stanley also has been supplying gasoline-blending components to Northeastern U.S. facilities operated by Sunoco Logistics Partners
LP, Exxon Mobil Corp.
and Motiva Enterprises LLC, a joint venture of Royal Dutch Shell
PLC and Saudi Aramco, Saudi Arabia’s state oil company.
Castleton, based in Stamford, Conn., evolved from a spinoff of Louis Dreyfus Commodities Group’s energy-trading business several years ago.
Its owners include Mr. Dubin, a co-founder of $30 billion asset manager Highbridge Capital Management, which was later sold to J.P. Morgan Chase
& Co., and Mr. Jones, founder of Tudor Investment Corp. Castleton’s chief executive is William C. Reed II, onetime head of power trading at Enron Corp.
Castleton’s bid topped that of the other contenders for Morgan Stanley’s unit, including Australian bank Macquarie Group Ltd.
and private-equity giant KKR Inc.,
according to people familiar with the talks.
Castleton and KKR had previously submitted a joint bid for J.P. Morgan’s physical-commodity assets when they were on the block in 2013. That business was ultimately sold to Swiss trading house Mercuria Energy Trading Inc. Castleton and KKR bid separately this time.
J.P. Morgan sold its physical-commodities business last year, and Goldman Sachs Group Inc.
divested a chain of metals warehouses in December. The Fed is preparing tighter restrictions on banks that trade commodities.
The value of physical assets would constitute much of the sale price. Those assets include barrels of oil and fuel, leases for pipeline capacity and storage terminals, supply and marketing agreements with oil companies and a 49% stake in a company that operates pools of tanker ships, Heidmar Holdings LLC. Those values could fluctuate in line with market prices.
The bank had $1.6 billion in tradable assets such as crude oil at the end of 2014, according to its most recent holding report filed with the Fed.
The other part of the price would be a premium, or the value assigned to the trading franchise Morgan Stanley has established in the oil market. The bank has been seeking premiums in the range of $300 million to $400 million, but the offers have come in the $200 million-to-$300 million range, according to people familiar with the talks.
Write to Christian Berthelsen at firstname.lastname@example.org and Justin Baer at email@example.com
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