The Connecticut-based independent global commodities merchant, Castleton Commodities International, took over the slumping physical oil business of Morgan Stanley (MS, Financial), which has been the largest and oldest on Wall Street. The details of the deal were not disclosed; however, analysts are of the belief that the deal must have been worth a little more than $1 billion. Through the deal, while Morgan Stanley’s 30 years of leadership in the physical oil markets will come to an end, Castleton commodities is set to gain a number of oil tank storage leases, physical oil supply and purchase contracts and a team of around 100 traders.
Proceedings of the deal
The company, which took over from Morgan Stanley, is a commodity trading firm backed by hedge-fund biggies Paul Tudor Jones (Trades, Portfolio) and Glenn Dubin. The amount at which the deal has been estimated to be done clearly shows the state of the Wall Street’s bank and the urgency to sell off the unit. Castleton however looks positive about the acquisition as it hopes to have more scale and scope to compete in the massive global oil market. The company has expressed that the acquisition would be a measure to become "a top tier global multi commodity merchant."
Post the merger, CCI expects about 100 front office staff including traders and shippers to move to the company; a total of 200 employees will also get transferred to CCI. Tom Simpson and Fabrizio Zichichi, who were leading the oil trade business under Morgan Stanley, will continue with their responsibilities under the new company CCI. The global head count post the acquisition will come to around 900, which is much smaller as compared to competitors Vitol and Trafigura who have thousands of employees working under them. But, considering CCI to be a relatively asset-light company, the number is reasonable.
The role of Morgan Stanley in client facing oil-trading business will remain unchanged including physical and paper transactions. The sale of the bank’s unit was long pending as the bank wanted to divest the unit considering the growing regulatory pressure and weakening profits.
Why the sale
AS per CCI, the physical oil unit of Morgan Stanley has 45 oil storage leases for about 30 million barrels present mainly in the US and Europe. The unit was able to trade about 2 million barrels per day (bpd) of crude and oil products in the last five years.
Sale of its physical oil unit has come as a big relief to the bank as it was getting pressurized by the Federal Reserve to get out of the physical commodities business. In the past as well, the bank had made efforts to sell off the unit. Talks with Qatar could not work out as well as with Russian oil giant Rosneft (RNFTF, Financial) because Washington had put sanctions on Moscow.
The said unit was once at its peak in the early 1990s as a trader named Olav Refvik pulled off a number of leases on storage tanks at a key import hub which gave him the honor of "King of New York Harbor." The business continued to decline with 2014 seeing the worst decline of merely 10 to 15 oil tankers a month which used to be over 100 during good times. A severe loss was seen in the net revenues amounting to $676 million in 2012 from $1.3 billion in 2008.
What next
Although Morgan Stanley hasn’t made a complete exit from commodities market, as revenues from the said sector went up 2% in the first quarter. CCI on the other hand will be fully prepared to leverage the maximum from the newly acquired business with hopes for the oil market to surge up once again. Once the regulators approve the deal, which is expected to happen in the second half of the year, both the companies will take on with their new responsibilities.
