Magazine article American Banker

Morgan Stanley: Discover Spinoff Is No Done Deal

Magazine article American Banker

Morgan Stanley: Discover Spinoff Is No Done Deal

Article excerpt

Morgan Stanley said fiscal second-quarter earnings at its Discover Financial Services Inc. dropped 19% from a year earlier, and the investment banking firm sent new signals that it might reconsider its spinoff plan for the unit.

David H. Sidwell, Morgan Stanley's chief financial officer and an executive vice president, sounded uncertain about the spinoff plan, announced in April.

"We have to be mindful of the [market] environment," Mr. Sidwell said on a conference call Wednesday. "It is definitely weaker than when we talked about it in April."

Richard X. Bove, an analyst at Punk Ziegel & Co., said Mr. Sidwell sounded like "he was backpedaling like crazy" on the plan. "It sounded like he was moving very definitely in the direction of 'We won't do this thing.' "

On the call, Mr. Sidwell said Morgan Stanley wants "to make sure we understand all the synergies and dis-synergies" of a Discover spinoff.

Funding costs for the card business are high on the list of considerations, but there are other things to consider, he said.

"We continue to be very focused on analyzing the merits of a Discover spinoff, and apart from mechanical aspects of the spinoff, we are spending a significant amount of time on key areas -- first, ensuring the transaction enhances overall shareholder value, and second, on working closely with the ratings agencies to make sure Discover will be well-positioned as a stand-alone company," Mr. Sidwell said.

"We believe with its current allocated capital base of $4.3 billion, and retained earnings prior to spinoff, it will be appropriately capitalized at $4.5 to $4.7 billion," he said.

In language that made it clear the spinoff was no done deal, he said, "We will keep you updated as a definitive decision is made."

Mr. Bove said Discover's lackluster earnings during the quarter, which ended May 31, could make investors less interested in a spinoff. …

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