Last week, Cincinnati-based Fifth Third Bancorp (FITB) announced the impact of Vantiv Inc.‘s (VNTV) initial public offering (IPO) of Class A shares on the company. The offering, which completed on March 21, 2012, raised $500 million at an average price of $17 per share.
As a result of this offering, FITB expects to record $95 million ($60 million after-tax) as pre-tax gain in the first quarter of 2012.
U.S.-based Vantiv, formerly known as Fifth Third Processing Solutions, is a payment processing company dealing with more than 12.9 billion payment transactions and about $426 billion in volume annually. In 2009, FITB spun-off Fifth Third Processing Solutions. Following this, a joint venture was initiated between Advent International and Fifth Third Bank, a subsidiary of FITB. The company was named Vantiv in June 2011.
After the commencement of Vantiv’s IPO, FITB holds 40% interest in Vantiv, though it had 49% ownership before the IPO. Moreover, FITB continues to hold about 86 million Class B units of Vantiv Holding. These shares are exchangeable for Class A Common Stock of Vantiv Inc. on a one-for-one basis coupled with a warrant, which can be exercised and exchanged into Vantiv Inc. Class A Common Stock. These securities are dependent on certain conditions and restrictions.
The underwriters of the IPO offering have been given a 30-day option to cover over-allotments. Therefore, if the option is completely exercised, FITB would earn an extra pre-tax gain of about $17 million ($11 million after-tax) in the quarter. Moreover, the remaining stake of Vantiv’s earnings for FITB would get reduced to 39%.
Moreover, recently, the Federal Reserve declared that it does not have any objection to the capital actions of FITB including a continuation of its quarterly common dividend of 8 cents per share and the redemption of up to $1.4 billion in certain trust preferred securities.
The Fed also did not object to the company’s strategy of repurchasing common shares in an amount which is at par with any after-tax gain realized by Fifth Third from the sale of Vantiv Inc. common shares by either FITB or Vantiv.
We believe that with a diversified traditional banking platform, FITB remains well positioned for future growth. A protracted economic recovery, a low interest rate environment as well as regulatory changes remain challenges. Yet, we expect the company’s proactive efforts to help navigate through the challenge comfortably.
FITB currently retains a Zacks #3 Rank, which translates into a short term Hold rating. Considering the fundamentals, we are also maintaining a long term Neutral recommendation on the stock.
To read this article on Zacks.com click here.
Zacks Investment Research
