Wells Fargo & Co. (WFC) has decided to offload its H.D. Vest Financial Services business to Parthenon Capital Partners, a private equity firm. The company has entered into a definitive agreement in this context with Parthenon Capital. However, the terms of the deal were not disclosed.
Wells Fargo had acquired H.D. Vest in 2001. Based in Irving, Texas, H.D. Vest offers investment and financial advisory solutions to over 1.8 million retail investors through an advisor base of over 4,800 securities-licensed tax professionals. Subsequent to the transaction, H.D. Vest’s existing management team, headed by Roger Ochs, will continue operating the business.
The deal is a strategic fit for Wells Fargo, which is restructuring its business to optimize its business model. According to the company, the unit fails to align precisely with the business model of Wells Fargo Advisors, the retail brokerage unit of Wells Fargo. However, this sale does not imply a change in the brokerage firm’s approach to serving independent advisors through Wells Fargo Advisors Financial Network (FiNet).
While on one hand, Wells Fargo is shedding a business unit, it is also making opportunistic acquisitions for future growth on the other. In May, the company decided to acquire substantially all of the U.S.-based operating assets of Foreign Currency Exchange Corporation, a wholly owned subsidiary of the Bank of Ireland Group (IRE) in an effort to expand its international banking capabilities. This deal is expected to substantially strengthen Wells Fargo’s foreign currency exchange capabilities for domestic correspondent banks.
In December 2008, Wells Fargo had acquired Wachovia Corporation, the nation’s fourth largest bank, according to its market value in the prior year. The transaction was valued at $12.5 billion to Wachovia common stockholders. Exposed to risky loans, Wachovia began to experience heavy losses in its loan portfolios during the subprime mortgage crisis. At that time, Citigroup Inc. (C) was also in the race to take over Wachovia.
Capital ratios are strong, and the dividend and share buyback initiatives inspire investors’ confidence in the stock. Moreover, considering the current economic environment, the recent trend in credit metrics and efforts taken by the company to improve its credit quality, we expect additional reserve releases in the upcoming quarters.
Management continues to focus on opportunities for further cost decreases through efforts implemented on a company-wide basis. In addition to this, with the conclusion of the integration process and continued economic recovery, expenses are likely to decrease, thereby providing opportunities for future earnings growth.
Yet, revenue growth remains challenged at Wells Fargo. Going forward, we believe top-line headwinds would persist given the protracted economic recovery, with lackluster loan growth and legacy mortgage issues. Regulatory issues also seem to cap the company’s fee income growth prospects.
Wells Fargo shares retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
