Top U.S. retirement plan administrator Principal Financial Group said on Tuesday it would buy Wells Fargo & Co’s retirement plan services business for $1.2 billion, as it seeks a larger presence in markets serving mid-sized companies.
The agreement includes an earnout of up to $150 million tied to better-than-expected revenue retention, payable two years after closing, which is likely in the third quarter, Principal Financial said.
“Principal will gain a strong foothold with mid-sized employers as more than two-thirds of Wells Fargo’s institutional retirement assets are in plans ranging from $10 million to $1 billion,” the company said.
The deal will be financed with cash and debt and will add to net income and adjusted earnings per share in 2020. The company said its share buybacks would be suspended until the first-quarter in 2020.
Once the unit is fully integrated in 2022, the company said it could see annual net revenue of around $425 million, and pretax return on net revenue of 28 percent to 32 percent.
The Des Moines, Iowa-based company will serve a combined 7.5 million U.S. retirement customers, and take over Wells’ contribution, benefit, executive deferred compensation, employee stock ownership plans, institutional trust and custody and institutional asset advisory businesses.
Wells Fargo has been looking to trim its business ever since it came under regulatory scrutiny following a sales practice scandal. In 2018, the Federal Reserve slapped it with an unprecedented asset cap, citing “widespread consumer abuses and compliance breakdowns.”
The bank is scheduled to announce its first-quarter results on Friday.
Lazard is the financial adviser to Principal, while Debevoise & Plimpton provided legal counsel.
(Reporting By Aparajita Saxena in Bengaluru; Editing by Sriraj Kalluvila and Shailesh Kuber)