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Fifth Third Bancorp (FITB - Analyst Report) is likely to recognize a pre-tax gain of approximately $225 million (around $145 million after-tax) in the second quarter of 2013 from the sale of its 15% stake in Vantiv Inc. (VNTV - Snapshot Report). The proceeds from the sale are expected to aid Fifth Third in repurchasing its own common shares.

Notably, Vantiv has priced a secondary offering of 38.6 million shares of its Class A common stock, which are sold by shareholders. Of the total, Fifth Third sold 15.6 million shares.

Moreover, out of the shares sold by selling shareholders in the offering, Vantiv would repurchase 17.5 million shares. Therefore, following these transactions, Fifth Third would record an approximate 15% drop in its ownership position in Vantiv.

The stake sale by Fifth Third comes on the heels of the approval of its capital plan by the Federal Reserve under the Comprehensive Capital Analysis and Review process in Mar 2013.

Stake Sale in Detail

Following this secondary offering of 15.6 million shares of Class A common stock, around 54.6 million Class B units of Vantiv Holding LLC would continue to be held by Fifth Third. These may be exchanged for Vantiv’s Class A common stock and a warrant, which are exercisable as well as exchangeable into Vantiv’s Class A common stock.

The remaining economic interest of Fifth Third in Vantiv’s future earnings would be approximately 28%. Fifth Third realized $140 million (pre-tax) under the equity method earnings in the fourth quarter of 2012 from its ownership in Vantiv, while first-quarter 2013 results included a pre-tax benefit of $34 million on the valuation of the warrant, held by Fifth Third in Vantiv.

Notably, the underwriters of the offering have an option to buy an additional 2.1 million shares of Vantiv’s Class A common stock, including 0.8 million shares from Fifth Third. This option is only for covering over-allotments and exercisable for 30 days from the pricing date. However, if exercised, the impact on Fifth Third is likely to be restricted to a maximum of 5% of the impact from the initial sale.

The Back Story

U.S.-based Vantiv, formerly known as Fifth Third Processing Solutions (FTPS), is a payment processing company dealing with more than 12.9 billion payment transactions valued at $426 billion annually.

Fifth Third had spun-off FTPS in 2009 following a joint venture that was initiated between Advent International and Fifth Third Bank, a subsidiary of Fifth Third. The company was named Vantiv in Jun 2011. Notably, Vantiv Inc. opted for an initial public offering of Class A shares of the company. The offering was completed on Mar 21, 2012.

Our Viewpoint

Any measures that would help optimize the balance sheet and share buybacks is encouraging and represent an efficient use of funds. Such actions would help create value for shareholders.

Going forward, with a diversified traditional banking platform, Fifth Third remains well poised to benefit from a recovering economy along its footprints. Its traditional commercial banking franchise, diverse revenue mix, improved credit quality and enhanced capital position serve as positive catalysts for the stock. Further, we believe that its capital deployment activities will boost shareholders’ confidence.
 
However, a low interest-rate environment, regulatory issues as well as competitive pressures are the headwinds.
 
Fifth Third currently carries a Zacks Rank #3 (Hold). Some better performing banks include JPMorgan Chase & Co. (JPM - Analyst Report) and State Street Corporation (STT - Analyst Report), with a Zacks Rank #2 (Buy).

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