As part of its effort to discard non-core assets, Bank of America Corp. (BAC) decided to sell its 5.4% stake in Brazilian lender Itau Unibanco (ITUB) on Tuesday. The deal will help Bank of America (henceforth BofA in the blog) generate net proceeds of about $4.5 billion (Brazilian Reals 8.16 billion).
As part of the deal BofA will sell its 188.4 million preferred shares in Itau Unibanco through a secondary offering. The offering is expected to happen early next month. BofA will also sell 56.5 million shares to Itau Unibanco’s controlling shareholder, Itau SA.
Following the closure of the stake sale, BofA will no longer have any rights in Itau.
BofA’s partnership with Itau Unibanco started in 2006, following the Brazilian bank’s takeover of the local unit of FleetBoston Financial. However, gradually it became a non-core part of BofA.
BofA has gone through a challenging period due to the overall market turmoil and its huge exposures to the risky segment of the market. Finally, it borrowed $45 billion of bailout money from the government by participating in the Troubled Asset Relief Program (TARP) during the period of December 2008 to January 2009. However, in December 2009, it repaid the entire $45 billion of bailout money.
BofA’s first quarter 2010 earnings show that it has bounced back to profitability after incurring significant losses in the last couple of quarters. Strong capital markets activity and lower provision for credit losses were the primary factors that helped BofA to achieve such results. However, the Itau investment was being carried by its balance sheet at a cost of $2.6 billion in its first quarter results. As the stake sale is valued at $4.5 billion, BofA will make an almost 70% gain from this deal.
BofA’s latest decision to sell its stake in Itau Unibanco can be viewed as a major step to restructure its balance sheet, as this is expected to significantly support its upcoming earnings.
The company is also focused on expense reduction through retrenchment. We expect these initiatives to strengthen the company’s financials, enabling it to navigate in the ongoing market turmoil and making it a more vibrant competitor in the future.
The market turmoil was more harmful to BofA than its peers, the only exception being Citigroup (C). BofA also concluded its biggest acquisitions in this period. The company acquired Merrill Lynch when the financial crisis was raging, last year. It also acquired Countrywide Financial Corporation in July 2008. The CEO views these deals as beneficial for stakeholders of the company. Furthermore, this will allow the bank to focus on rebuilding and expanding customer relationships.
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Read the full analyst report on “ITUB”
Read the full analyst report on “C”
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