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On Wednesday,The Financial Times reported that Bank of America Corporation ( BAC - Analyst Report ) is in advance talks with The Blackstone Group ( BX - Analyst Report ) to the sell real estate assets held by its Merrill Lynch unit for nearly $1 billion. The company had acquired Merrill Lynch in late 2008.
BofA has been trying to remove property investments worth $800 million to $1 billion in Europe, South America and the U.S. The portfolio, which BofA wants to sell, includes a large number of real estate debt and equity positions across various countries, such as stakes in logistics properties in central Europe, nonperforming loans in Italy, a Brazilian property developer and shopping centers in Spain.
As of June 30, 2011, BofA had investments and unfunded commitments of $1.7 billion in global real estate portfolio, down from $2.2 billion as of June 30, 2010. Hence, the closure of the deal would mostly complete BofA’s efforts to divest the real estate part of its principal investments unit that also includes private equity and other investments made by using the company’s own money.
Though the spokespersons for both BofA and Blackstone refused to comment on the deal, some reliable sources stated that the transaction could still be called off.
BofA and Blackstone were in relation before as well. In 2010, BofA and Blackstone had entered into a transaction under which Blackstone was assigned to manage BofA’s Asian real estate investment portfolio worth $2 billion at that time.
Considering various regulatory changes and new rules, including the Volcker rule being implemented following the financial crisis, the U.S. financial institutions have been trying to realign their balance sheets in order to comply with them. The Volcker rule limits the way banks can invest their own capital. Furthermore, the banks have been lowering their exposure to private equity investments as they would be required to hold more capital under the new Basel III regulatory rules.
This is not the first time that BofA is going to be asset light by shedding its non-essential businesses and units. Earlier this week, BofA announced its plans to sell $8.6 billion Canadian credit card portfolio as well as certain other assets and liabilities of TD Bank Group and also exit from its credit card businesses in the U.K. and Ireland.
In July, BofA had announced a deal to sell its Balboa Life Insurance Co. and Balboa Life Insurance Co. of New York to Securian Financial Group Inc. Furthermore, in June, BofA announced the completion of the sale of Balboa Insurance Company and affiliated entities to Australia-based QBE Insurance Group. The company had inherited Balboa from Countrywide Financial, which it acquired in 2008. BofA also completed the spin-off of its last largest private equity fund in June, which led to the creation of a new company named North Cove Partners.
Additionally, last year BofA undertook a number of non-core asset shedding actions. Among others, in November, BofA sold 43.6 million of its BlackRock Inc. ( BLK - Analyst Report ) shares for $163 each. Furthermore, the company sold an additional 2.5 million shares of BlackRock to Japan’s third-biggest bank Mizuho Financial Group Inc. Also, in July 2010, BofA completed the sale of First Republic Bank ( FRC - Snapshot Report ) for $1.86 billion to a group of investors led by Colony Financial Inc. ( CLNY - Snapshot Report ) and General Atlantic LCC.
With BofA’s plan to boost dividend in the second half of 2011 being turned down by the Federal Reserve in March, the company will likely continue with its non-core asset shedding activities until its capital strength improves and balance sheet fortifies. BofA is looking to concentrate more on businesses that directly serve customers as well as strengthen its balance sheet.
Furthermore, BofA had been facing an inquiry regarding its role in the foreclosure mess since last year. However, the company might soon settle a state and federal probe into foreclosure practices through a deal. This would bring some relief to the company and boost the investors’ confidence in the stock. This justifies BofA’s Zacks #3 Rank, which translates into a short term ‘Hold’ rating.
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