Principal to Buy Wells Fargo Retirement Unit for $1.2 Billion

(Bloomberg) -- Wells Fargo & Co. agreed to sell a retirement plan services unit to Principal Financial Group Inc. for $1.2 billion as the bank streamlines operations in the wake of scandals.

The business, which has $827 billion in assets under administration, includes operations in the U.S., the Philippines and India, Principal said Tuesday in a statement. Principal gains operations that handle 401(k) and pension plans, executive deferred compensation and institutional trust and custody offerings.

Wells Fargo, the fourth-largest U.S. bank by assets, has been paring smaller business lines since scandals began erupting from its branch network in 2016. Problems have since emerged in more units, prompting the Federal Reserve to ban Wells Fargo from growing until regulators are confident in executives’ ability to oversee their operations. That’s added to pressure on the firm to shed some units and concentrate on those where it can earn the best returns.

“This sale reflects Wells Fargo’s strategy to focus our resources on areas where we can grow and maximize opportunities within wealth, brokerage and asset management,” Jon Weiss, head of Wells Fargo’s wealth and investment-management business, said in a separate statement.

Savings Targeted

The retirement plan services business is part of Wells Fargo’s wealth and investment-management arm. Weiss has been working to make the unit more efficient since he took over in 2017. At the bank’s 2018 investor day, he said he’s targeting $600 million in savings by 2020. Earlier this year, Weiss hired Nyron Latif from Goldman Sachs Group Inc. as head of operations to review the unit’s efficiency.

The Fed barred Wells Fargo in February last year from increasing assets beyond their level at the end of 2017, citing concerns about a variety of customer abuses, including the revelation that employees had opened millions of accounts without consumers’ permission. The bank told analysts and investors at the start of this year that it’s planning to operate under the cap through the end of 2019, rather than just the first half.

The bank has undergone a leadership change in recent weeks, announcing in March that it would replace Tim Sloan as chief executive officer after the leader faced calls for his ouster from politicians. C. Allen Parker, Wells Fargo’s general counsel, was named Sloan’s replacement on an interim basis.

What Bloomberg Intelligence Says

“Principal’s proposed acquisition of Wells Fargo’s institutional retirement/trust unit for $1.2 billion will boost defined-contribution assets under administration by 80%, adding scale to help combat industrywide fee-rate pressure. The deal should also further leverage technology investments in Principal’s flagship unit.”
--Jeffrey Flynn and Derek Han, insurance analysts
Click here to view the research.

The deal will double Principal’s U.S. retirement business and expand its reach with mid-sized employers, giving it 7.5 million retirement customers nationwide. The purchase, which is expected to be completed in the third quarter, will add to the company’s net income next year, Principal said.

“The acquisition will bring expanded capabilities, reach and scale,” Principal Chief Executive Officer Dan Houston said in his company’s statement.

To help finance the purchase, Principal will suspend its share-buyback program, resuming it no later than the first quarter of next year, Houston said on a conference call Tuesday. The acquisition also will be financed with debt and cash on hand, the company said.

Lazard Ltd. was a financial adviser to Principal on the deal, and Debevoise & Plimpton LLP was its legal counsel. Wells Fargo’s investment-banking arm advised the company on the sale, while Skadden, Arps, Slate, Meagher & Flom LLP was its legal adviser.

--With assistance from Jenny Surane.

To contact the reporters on this story: Hannah Levitt in New York at hlevitt@bloomberg.net;Katherine Chiglinsky in New York at kchiglinsky@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Daniel Taub, Steve Dickson

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