Bringing an end to months of speculation, Bank of America Corporation (BAC - Analyst Report) is finally divesting its international wealth management operations to Switzerland-based private bank, Julius Baer Group, for nearly CHF860 million ($882 million).
The decision to offload these units is a part of BofA’s long-term strategy to build up capital and divest its non-core and unprofitable businesses.
BofA stated that Julius Baer will be paying approximately 1.2% of total client assets ($84 billion as of June 30, 2012). Further, out of the total consideration, the company will receive roughly CHF240 million ($246 million) worth of Julius Baer’s common shares (nearly 3% shareholding) and the remaining in cash.
However, BofA commented that the final selling price will be based on assets under management (AUM) at the time of the deal's closure. The transaction, which is still subject to regulatory approvals, is expected to close by the end of this year or early next year.
Additionally, the divestiture does not include BofA’s joint venture with Mitsubishi UFJ Financial Group Inc. (MTU - Analyst Report) − Mitsubishi UFJ Merrill Lynch PB Securities. Also, the company’s international wealth management offices based in U.S. are not a part of the deal.
Further, BofA and Julius Baer have entered into a separate agreement under which BofA would be offering global equity research and structured and advisory products to the Swiss bank.
For Julius Baer, the deal would boost its AUM by 40% and be accretive to its earnings from the third full year of the closure of the deal. Nevertheless, the acquisition would lead to restructuring, integration and retention charges of about CHF400 million.
Moreover, the transaction would further diversify Julius Baer footprints in faster growing emerging markets − Asia, Latin America and the Middle East.
To finance its agreement with BofA, apart from terminating the share repurchase authorization, Julius Baer will utilize the available cash (CHF 530 million) and raise nearly CHF750 million through rights issue. The total cash thus accumulated will be used to consummate the aforesaid deal and also fund future acquisitions.
BofA has been actively divesting its non-core and unprofitable operations since the last two years. The company has been doing so in order to recover from losses related to its acquisition of Countrywide Financial in 2008 and meet regulatory capital requirements.
Since the beginning of 2010, BofA has completed the divestiture of more than 20 non-core asset as part of an overall strategy to streamline its operations. All these initiatives, along with Project New BAC are expected to boost the company’s capital ratios. As of June 30, 2012, Tier 1 common capital ratio under Basel III was estimated at 8.10%.
Currently, BofA retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock.