To widen its presence in the emerging marketplace, Principal Financial Group, Inc. (PFG) inked a deal to buy Chile based AFP Cuprum S.A. (Cuprum). The deal also entails Empresas Penta S.A. and Inversiones Banpenta Limitada to vend off their 63% stake in Cuprum. Cuprum is a leading pension manager in Chile with about $32.1 billion of assets under management.
The total purchase consideration equates to $1.51 billion based on the present exchange rate. The transaction is expected to consummate in the first quarter of 2013, subject to closing conditions.
Also, the acquisition will be immediately accretive to earnings per share and return on equity. The Zacks Consensus Estimate for 2013 is currently pegged at $3.34, representing a year-over-year increase of nearly 23%.
Moreover, Principal has been intensifying its focus on fee based business that enables the company to return more earnings to shareholders. Cuprum acquisition marks the sixth such transaction in the past two years.
Principal Financial already has operations in the emerging markets of Brazil, Chile and Mexico and this acquisition will give it an added edge. Cuprum has a dominant position in the Chilean pension market with the highest increase in market share among high value customers.
It is noteworthy that increasing middle income group population, steady economic growth and a sturdy improvement in voluntary pension products have driven the Chilean pension market to consistently grow at double-digit rates.
Principal believes that they would be offering the prospective customers a unique array of pension savings and retirement income solutions. In turn, it will help it generate more business, thereby aiding the company to deliver solid numbers.
Following the announcement to buy Cuprum, rating agencies – A.M. Best Co., Moody’s Corp. (MCO), Standard and Poor’s and Fitch ratings – have taken rating action on Principal Financial.
Standard and Poor’s, though affirmed the ‘BBB+' counterparty credit ratings of Principal Financial and Principal Financial Services Inc. (an intermediary holding company), as well as ‘A+' counterparty credit and financial strength ratings on Principal Life Insurance Co. (:PLIC), lowered the outlook to negative from stable. The outlook downgrade accounts for higher financial leverage, lowered fixed-charge coverage ratio, and higher capital deficit at PLIC.
Moody’s also reiterated the rating but lowered the outlook to negative.
Fitch ratings brought the ratings of Principal Financial Group and its insurance company subsidiaries on Rating Watch Negative, based on the concerns of increased financial leverage.
A.M. Best Co. kept the financial strength, issuer credit and debt ratings of Principal Financial Group unaltered. The outlook of the ratings remains stable.
We retain our Neutral long term recommendation on Principal Financial. The company currently carries a Zacks #3 Rank, translating into a Hold rating in the short term.
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