Principal Financial Group, S.A. de C.V., has agreed to acquire HSBC AFORE, S.A. de C.V. (HAFO) from Grupo Financiero HSBC, S.A. de C.V., as announced by The Principal Financial Group Inc. (PFG). HSBC Afore, SA de C.V., is the pension funds management business of Grupo Financiero HSBC, SA de C.V.
The purchase consideration is approximately $198 million. The acquisition is expected to close by early third-quarter 2011, pending regulatory approval. Also, the acquisition is expected to be immediately accretive to earnings per share as well as return on equity.
Once approved, the new entity will be called Principal AFORE resulting from the merger of HSBC AFORE with the Mexican pension fund business of Principal. Also, it will become the country’s sixth largest in assets under management with more than 7% market share and fourth largest by customers with approximately 11% market share. Principal successfully continues offering employee retirement plans and has integrated a number of AFORE businesses in Mexico since 1993.
The acquisition of HSBC AFORE is in sync with management’s intention to strategically deploy $700 million of capital over a period of 1 year for appropriate merger and acquisition. Also, the acquisition enhances Principal’s presence in Mexico. Principal is a leading retirement service provider with a focus on Mexico and Latin America.
Principal AFORE’s products will be offered through HSBC’s network of more than 1,100 branches pursuant to the agreement between Principal and HSBC Bank. Principal AFORE’s pension assets will increase by $2.9 billion or 62% along with the addition of 1.6 million customers after the merger.
Principal AFORE has recorded a compounded annual growth of 32% in assets under management since 2008. The company expects to continue to deliver strong numbers by tapping the growing middle class market in Mexico.
Principal Financial reported a strong fourth quarter on the heels of strong performance at Retirement and Investor Services as well as at Principal Global Investors. The Zacks Consensus Estimate for first-quarter 2011 is 70 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $2.96 per share and $3.38 per share.
Principal’s strong franchise within the pension sector, aided by its diversification in both products and geography, positions it to benefit from the gradual recovery of the credit market. Decent capital levels and cost containment measures also augur well, though higher delinquencies in its commercial mortgage portfolio remain a matter of concern.
We maintain our Neutral recommendation on Principal Financial. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates upward pressure on the shares over the near term.
Based in Des Moines, Iowa, Principal Financial Group Inc. provides an expansive range of retirement savings, investment and insurance products and services through its various subsidiaries. It competes with Lincoln National Corporation (LNC).
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