By Christian Berthelsen And Justin Baer
Trading firm Castleton Commodities International LLC has emerged
as the leading bidder for Morgan Stanley's oil-trading and storage
business, the latest development in the bank's yearslong effort to
jettison the unit.
Castleton, whose backers include hedge-fund heavyweights Glenn
Dubin and Paul Tudor Jones, is offering more than $1 billion for
the business, according to people familiar with the situation. That
number would include the value of assets the unit holds, such as
barrels of crude oil and storage facilities.
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 unloading 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 transporting commodities
pose a systemic risk to the financial system, while U.S. senators
have accused banks of unfairly exploiting the multiple roles they
play in the market in order to maximize profits.
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 part 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 on Monday.
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 that 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, a power trader and onetime executive 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 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.
Write to Christian Berthelsen at christian.berthelsen@wsj.com
and Justin Baer at justin.baer@wsj.com
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