Scandal Ridden Bank Wells Fargo Earnings Outlook

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    Wells Fargo Q4 revenue before the bell Tuesday….



    Wells Fargo to sell its Institutional Retirement & Trust (IRT) business to Principal Financial Group (NASDAQ: PFG).

    Wells Fargo’s IRT unit includes its retirement plan record keeping and administrative services for 401(k) and pension plans, as well as its nonqualified executive deferred compensation, institutional trust and custody and institutional asset advisory businesses.

    The Principal Financial press release indicated that the deal’s purchase price is $1.2 billion, and it also includes an earn-out of up to $150 million tied to better than expected revenue retention, payable two years post-closing.

    The Wells Fargo press release noted that the financial details related to the transaction (including the sale’s expected gain to Wells Fargo) will be disclosed when the transaction is completed. Completion of the transaction is subject to regulatory approvals and is anticipated to close in the third quarter.

    The transaction will create one of the largest retirement providers in the industry, which Principal Financial called a top-3 defined contribution record keeper. As of December 31, 2018, the Wells Fargo division had $827 billion in assets under administration and served 3.9 million 401(k) participants and pensioners with roughly 2,500 employees.

    Principal Financial already serves more than 24 million customers with retirement, asset management and insurance solutions with roughly 16,000 global employees. The release from Principal Financial indicated that the combined company would serve a combined 7.5 million U.S. retirement customers.

    Principal Financial is issuing new debt to the tune of $400 million to $500 million and is temporarily suspending share buybacks to help pay for the acquisition. Principal Financial also expects to see roughly $425 million in annual net revenues added to it upon full integration, with a 28% to 32% pretax return and a 20% to 25% pro forma leverage ratio long term.

    Principal Financial sees this deal as accretive to net income and adjusted operating earnings per share in 2020, effectively accretive by the end of the first full year.

    A combined statement from the head of Wells Fargo Wealth & Investment Management and from the head of the IRT unit said:

    The Institutional Retirement and Trust business is well-managed, award winning and highly respected in the market. The scale derived from a combination of IRT and the Principal Financial Group will benefit clients, plan participants, and team members. At the same time this sale reflects Wells Fargo’s strategy to focus our resources on areas where we can grow and maximize opportunities within wealth, brokerage and asset management…. A combination with the Principal team creates one of the largest retirement providers in the industry. The size, scale and breadth of capabilities delivered by a company dedicated to retirement savings and investing will be a great benefit to our clients and team members. As our leadership team has learned more about Principal, we see great commonalities between our two cultures, including our shared focus on service excellence and driving plan and participant outcomes. We look forward to the realization of our combined capabilities.

    The statement from Dan Houston, board chair, president and CEO of Principal Financial, said:

    Retirement is at the heart of our business and core to our future. This will be a powerful combination for customers, employees and shareholders as we solidify our place as a top-three leader in the U.S. retirement market. The acquisition will bring expanded capabilities, reach and scale; fueling our ability to compete, invest and grow to help more people to achieve their retirement outcomes.

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