Morgan Stanley could pay $2-3 billion for Smith Barney

By Dan Wilchins

NEW YORK (Reuters) - Morgan Stanley could pay $2 billion to $3 billion or more for a controlling stake in Citigroup Inc.'s Smith Barney retail brokerage business, two people familiar with the matter said.

The cash would be a big boon for Citigroup, which is under tremendous pressure from the U.S. government to shore up its balance sheet after taking $45 billion of government capital in October and November, they said.

The bank is considering multiple options in addition to the Morgan Stanley deal.

"Everything is on the table," one of the people familiar with the matter said, adding that the bank may put its toxic assets into a separate unit as a preliminary step toward shedding them.

Dismantling the rest of Citigroup would be difficult, one person said, noting that there are not many buyers for financial assets now. A few smaller businesses or groups may be sold off -- Citi has discussed internally the possibility of selling its Banamex Mexican banking unit, for example. But splitting up Citigroup completely is unlikely, he added.

Terms of the Morgan Stanley deal are still being worked out. Under the current plan, Citigroup and Morgan Stanley would set up a joint venture for their combined retail brokerage businesses. Morgan Stanley would own 51 percent, control the venture, and expect to buy Citigroup's remaining share over the next five years.

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Morgan Stanley would initially pay Citigroup around $2 billion to $3 billion or more, with further payments coming as Morgan Stanley bought more of the business.