MUFG stock sees biggest gain in 5 years on Morgan

(Adds details)

By David Dolan

TOKYO, Oct 14 (Reuters) - Shares of Mitsubishi UFJ Financial Group posted their biggest jump in five years after Japan's top bank came through with a planned $9 billion investment in struggling U.S. firm Morgan Stanley .

Mitsubishi UFJ paid $9 billion for 21 percent of the iconic Wall Street investment bank, all of which it took in preferred shares after rejigging its original agreement to buy both common stock and preferred shares.

The closing of the deal on Monday helped reassure Wall Street investors, who sent Morgan Stanley's stock rocketing after a week of sharp selling on concern the Japanese bank could back out of the arrangement.
By taking the stake in less risky preferred shares, which pay a hefty dividend of 10 percent, Mitsubishi UFJ also assuaged Tokyo investors who worried the deal may be a gamble.

Mitsubishi UFJ was assured by U.S. officials that any potential injection of public money into Morgan Stanley would not dilute its stake, according to a person familiar with the matter.

"There was a lot of concern about this deal at first, but the fact that they were able to change the terms, that they were able to take the stake in preferred shares, that is a positive," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

Mitsubishi UFJ said late last month it would buy $3 billion in common shares at $31.25 a share and take the rest in preferred shares, but that changed as the U.S. bank's stock went into freefall.

Under the new terms, about $7.8 billion of Mitsubishi UFJ's investment is in preferred shares with a conversion price of $25.25 a common share with no maturity date. The remaining $1.2 billion is in preferred stock that is not convertible and also has no maturity date.

All of the preferred shares pay a 10 percent dividend, unchanged from the original deal.

NEW TERMS

The Japanese bank pushed for new terms after Morgan's stake price fell to $9.28 last week, bringing the U.S. bank's value to $10 billion and sparking concern among its customers.

Over the weekend, a hesitant Mitsubishi UFJ and the Japanese government pressed the U.S. Treasury to guarantee that any injection of public money would not dilute the Tokyo-based bank's stake, said the source, who declined to be identified.

The two banks said in a statement that they will pursue a global strategic alliance in corporate and investment banking, retail banking and asset management.

Concrete details of the alliance will be determined by the end of June 2009, the two banks said.

Often described as Japan's most conservative bank, Mitsubishi UFJ is now making an aggressive push into the United States, looking to capitalise on a credit crisis that has crippled its Wall Street rivals.

The bank, which has so far avoided heavy subprime losses, last month paid $3.5 billion to take full control of California's UnionBanCal Corp, as it bets on long-term growth in the world's largest economy.

Mitsubishi UFJ is looking to grow behind its softening home market, where it is saddled with slow growth and a declining population.

Shares of Mitsubishi UFJ finished up by their daily limit of 100 yen at 810 yen, a gain of 14.1 percent and the stock's biggest one day rise since October 2003, when it rose 14.2 percent.

Shares of the bank saw little active trade, however, as they spent most of the day flooded with buy orders. (Reporting by David Dolan; editing by Sophie Hardach)