Wells Fargo Retirement & Trust Sale Seems to Be Reaching for Regulatory Concession Hopes

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When companies go afoul of regulators and when they have taken a serious reputational hit, sometimes they make bad reactionary decisions. News broke on Tuesday that Wells Fargo & Co. (NYSE: WFC) has entered into an agreement to sell its Institutional Retirement & Trust (IRT) business to Principal Financial Group Inc. (NASDAQ: PFG). Whether investors will see this as a great buy or as a bad sale may depend on multiple factors that are not yet fully known.

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 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. That said, 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 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.

As far as what Principal Financial gets here, the company 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.

After a perusal of the basic details, this deal looks like it could be a game-changer for Principal Financial if it is able to retain the bulk of the accounts it is acquiring. The company 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. In the end, 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.

It will be tough to decide upfront whether Wells Fargo was just hoping for regulatory easing here. Tim Sloan already fell his sword and stepped down as CEO, but Wells Fargo ended up finding itself under a “do not grow assets” position as a Federal Reserve consent order in early 2018.

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.

Wells Fargo shares were down almost 1% at $48.41 in the morning reaction, with a 52-week range of $43.02 to $59.53 and a market cap of $220 billion.

Principal Financial was last seen down about 1.3% at $52.60 a share, in a 52-week range of $40.42 to $62.07. Its market cap is $14.6 billion. As far as the “roughly $425 million in annual net revenues” that is expected to be added after the deal, Principal Financial’s 2018 revenue was $14.2 billion, and Refinitiv has a consensus revenue estimate of $14.76 billion for 2019 and $15.55 billion for 2020.


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