March 25, 2023

DealBook: Soros Buys a 7.9% Stake in J.C. Penney

George Soros, the billionaire hedge fund investor.Ralph Orlowski/ReutersGeorge Soros, the billionaire hedge fund investor.

J. C. Penney doesn’t have many fans on Wall Street. But a big one emerged on Thursday: George Soros.

Mr. Soros, the hedge fund billionaire, on Thursday disclosed a 7.9 percent stake in Penney, with 17.4 million shares, according to a securities filing. The stake is passive, meaning Mr. Soros will not try to exert influence on the embattled retailer.

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Penney’s shares rose nearly 7 percent in after-hours trading. The stock, which has taken a beating this year, ended regular trading up 5 cents at $15.24, before the stake was disclosed.

Mr. Soros, 82, is at least the second prominent hedge fund manager to take a shine to Penney, whose chief executive, Ron Johnson, was pushed out two weeks ago after 17 months on the job.

William A. Ackman, the head of Pershing Square Capital Management, also has a sizable stake. Penney’s shares fell more than 50 percent during the tenure of Mr. Johnson, a former Apple executive Mr. Ackman supported.


Mr. Johnson brought fresh ideas to Penney, trying to attract a new type of shopper. But those failed to improve the company’s sales. In February, Mr. Johnson admitted he made “big mistakes” in his turnaround effort after the company reported a $552 million quarterly loss.

Penney’s stock price has climbed since Mr. Johnson was replaced by the executive who had preceded him, Myron E. Ullman III, an appointment that was seen as a stopgap as the company tried to get back on its feet.

Mr. Ackman, whose firm owns a 17.8 percent stake in Penney, continues to express confidence in the company, though he seemed to lose faith in Mr. Johnson in the days before the management change was announced.

“I don’t see a scenario in which we don’t work this thing out,” Mr. Ackman said at a luncheon this month, according to a report at the time.

The move by Mr. Soros, a legend on Wall Street who stopped managing outside money several years ago, will most likely cause some investors to give Penney a second look.

It was not immediately clear what had prompted Mr. Soros’s interest in the retailer. But if Mr. Ullman wanted to visit two of his largest shareholders, he won’t have far to travel. Mr. Soros and Mr. Ackman share an office building in New York.

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DealBook: As Losses Mount, R.B.S. Unveils Plan to Sell Assets

A branch of the Royal Bank of Scotland in London.Facundo Arrizabalaga/European Pressphoto AgencyA branch of the Royal Bank of Scotland in London.

LONDON – The Royal Bank of Scotland, hammered by losses, announced plans on Thursday to sell assets and pare back its investment banking business, in an effort to appease regulators and its biggest shareholder, the British government.

R.B.S. said it planned to sell a stake in the Citizens Financial Group, the American lender it bought in 1988, through an initial public offering in two years. The bank will also continue to reduce its investment banking operations, with plans to cut risky assets and eliminate jobs.

The moves are designed to help bolster the bank’s capital levels and refocus its operations, part of a multiyear turnaround effort initiated by its chief executive, Stephen Hester. In the end, R.B.S. will emerge a much smaller bank, largely focused on Britain.

“R.B.S. is four years into its recovery plan,” Mr. Hester said in a statement, “and good progress has been made. We are a much smaller, more focused and stronger bank. Our target is for 2013 to be the last big year of restructuring.”

Like many rivals, R.B.S. is struggling with the legacy of the financial crisis and a spate of legal issues. On Thursday, it reported a bigger-than-expected loss, in part tied to its legal troubles.

The bank, in which the British government holds an 82 percent stake after a bailout in 2008, posted a net loss of £5.97 billion ($9 billion) in 2012, much larger than the £2 billion loss recorded in 2011. Analysts had been expecting a loss of £5.1 billion. For the last quarter of 2012, R.B.S. reported a £2.6 billion loss, up from a £1.8 billion loss in the period a year earlier.

The rising losses reflect the bank’s regulatory and legal problems.

R.B.S. said on Thursday that it had set aside an additional £1.1 billion to compensate clients to which it improperly sold insurance products, bringing the total provision to £2.2 billion. It also estimated it would have to pay £700 million to compensate small businesses to which it improperly sold some interest-rate hedging products.

The bank agreed this year to pay $612 million to British and American authorities to settle accusations of rate-rigging. Since then, Mr. Hester has promised to tighten controls at the bank to limit the risk of future rate manipulation.

The head of R.B.S.’s investment banking division, John Hourican, resigned at the beginning of February as a result of the scandal related to manipulating the London interbank offered rate, or Libor. The bank plans to pay its fine with money clawed back from bonuses.

‘‘Along with the rest of the banking industry we faced significant reputational challenges,’’ Mr. Hester said in the statement. ‘‘We are determined to overcome the cultural and reputational baggage of precrisis times with the same focus we have applied to the financial cleanup from that era.’’

Eager to get back some of the £45.5 billion it invested in R.B.S., the British government recently increased pressure on the bank’s management to speed up the reorganization.

Some analysts said the government could start selling parts of its investment in the bank, even at a loss, before the next general election, which is set for 2015. R.B.S.’s shares are still trading at about half what the government paid for them in 2008. Some lawmakers said they would favor handing out shares to the public instead of a possible sale of the stake on the open market.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said there were signs that Mr. Hester’s efforts to turn around the bank had started to pay off, but that “the ongoing absence of a dividend and overhang of the government stake are negatives which need to be resolved.”

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DealBook: Morgan Stanley to Take Over Smith Barney, With Citigroup’s Blessing

James Gorman, chief executive of Morgan Stanley.Peter Foley/Bloomberg NewsJames Gorman, chief executive of Morgan Stanley.

9:16 p.m. | Updated

Morgan Stanley has reached an agreement to take full control of the Smith Barney retail brokerage joint venture, a business that it has called a crucial part of its future.

The deal announced on Tuesday, ending a wrangle of some months between the company and its partner, Citigroup, was a coup for Morgan Stanley. Now the challenge will be whether the business of advising wealthy customers on their investments can help lift Morgan Stanley’s sagging fortunes as its core investment banking and trading operations contend with difficult markets and a heavier regulatory burden.

After negotiations that stretched well into Monday night, Morgan Stanley and Citigroup agreed to value the brokerage operation at $13.5 billion. That figure was significantly closer to Morgan Stanley’s estimate of the unit’s worth, letting it buy the rest of the enterprise at a lower price. Citigroup said it would take a $2.9 billion after-tax write-down from the transaction.

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The two companies outlined steps that would allow Morgan Stanley to buy the 49 percent of the business that it did not already own within three years. That will begin with the purchase of a 14 percent stake that will close by the end of September. Morgan Stanley will buy an additional 15 percent by next June.

That will fulfill a major part of the turnaround effort undertaken by Morgan Stanley’s chief, James Gorman. In a statement, he described the agreement as “a significant milestone for Morgan Stanley in the implementation of our strategy.”

The joint venture, Morgan Stanley Smith Barney, was born in 2009, forged from Citigroup’s Smith Barney unit and Morgan Stanley’s counterpart, as a way to benefit both companies. For Citigroup, which had long identified the brokerage as a nonessential asset to be sold off to free up capital, the deal will speed up its own rehabilitation plan.

“As we have shown, the more we put the past behind us, the more we can focus on our future, which is in the core businesses in Citicorp,” Vikram Pandit, Citigroup’s chief, said in a statement.

Howard Chen, an analyst at Credit Suisse, called the settlement a win for both firms, allowing them to more quickly achieve their objectives. “It’s a point of progress in capital management and increases the potential for capital return to shareholders,” he said.

Shares of Morgan Stanley jumped nearly 4 percent on Tuesday, to $17.25, while those in Citigroup rose 2.6 percent, to $32.66.

The retail brokerage business is one that Mr. Gorman knows well, having overseen both Merrill Lynch’s and Morgan Stanley’s units. Analysts say that it is an operation that requires relatively little capital for the company, while its most successful wealth advisers can bring in millions of dollars in revenue.

And Morgan Stanley Smith Barney is one of the biggest such businesses around. It accounts for the bulk of its Morgan Stanley’s wealth management business, which has nearly 17,000 wealth advisers and $1.7 trillion in assets under management.

Roughly 74 percent of the overall division’s clients have entrusted more than $1 million in assets to the firm’s wealth advisers.

The unit reported a $418 million profit for the first half of the year, up 15 percent from the year-ago period. Its revenue slipped 4 percent, however, to $5.9 billion.

But Mr. Gorman’s strategy isn’t without risk. The most productive advisers are constantly being poached by rival brokerages, or can choose to set up shop on their own. And when those individuals leave, they nearly always take their entire roster of clients, draining their former employers of millions of dollars in assets to manage.

Morgan Stanley Smith Barney’s own brokers have complained that the integration of the two firms’ operations has been anything but smooth, marred by technology issues. And rivals like Bank of America’s Merrill Lynch and Wells Fargo have been competing fiercely for clients.

While a clearly drawn path to Morgan Stanley’s eventual takeover of the brokerage has existed for years, getting there was difficult. In July, the two companies brought in an independent appraiser, Perella Weinberg Partners, to value the brokerage operation after each provided vastly different estimates of its worth. Morgan Stanley estimated its worth at a little over $9 billion, while Citigroup said it was worth closer to $23 billion.

While some of the disparity between the two estimates could be attributed to tactical posturing, both sides had substantive disagreements over how to value the brokerage and related assets like tax benefits, according to a person involved in the talks.

That prompted senior executives at both firms to plead their case. Besides Mr. Gorman, Morgan Stanley called upon Robert Kindler, the firm’s head of global mergers and acquisitions, and Gary Shedlin, a specialist in financial institutions. And Citigroup drew upon Edward J. Kelly, the chairman of its institutional clients group and a top dealmaker, and David Head, a co-head of financial institutions investment banking.

An e-mail from Perella Weinberg with the firm’s appraisal — less than $13.5 billion — reached Mr. Gorman and Mr. Pandit in their Midtown Manhattan offices shortly after 4 p.m., according to people briefed on the matter.

Because of rules set by both firms governing the appraisal process, the low figure meant that Morgan Stanley Smith Barney could have valued the business at more than $10 billion below Citigroup’s estimates. That could have led to a significant accounting charge for the bank.

And because Perella Weinberg’s appraisal covered only the 14 percent stake that Morgan Stanley is seeking to buy at the moment, further haggling over the brokerage’s value loomed.

Both firms then decided to negotiate an all-encompassing settlement that would obviate the need for additional drama. Senior negotiators for Citigroup arrived at Morgan Stanley’s offices off Times Square early Monday evening, for talks that stretched long into the night.

What emerged was Tuesday’s deal — and a looming end to the Smith Barney name, coined from the 1938 merger of Charles D. Barney Company and Edward B. Smith. The unit will be re-christened Morgan Stanley Wealth Management.

This post has been revised to reflect the following correction:

Correction: September 11, 2012

An earlier version of this article misstated the role played by the investment bank Perella Weinberg Partners, While the bank did provide an appraisal of the Smith Barney brokerage business, it was Morgan Stanley and Citigroup that came up with the $13.5 billion valuation of the business.

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