Principal is adding more than 600,000 mandatory-pension clients with $32.1 billion in assets under management to the annuity and mutual-fund businesses it runs in Chile. The firm has sought to buy a pension provider “almost from the start” of its Chilean business in 1995, Chief Executive Officer Larry Zimpleman said yesterday after the deal was announced.
“This was really the one part of the system we had not been able to penetrate,” Zimpleman said in an interview. “We can clearly pursue additional opportunities for contributions and revenue on the voluntary side, no question.”
Zimpleman is expanding in Latin American nations including Chile, Brazil and Mexico to capitalize on the increasing role of private companies in managing retirement funds. Chile pioneered the private pension system in 1981 to build up the country’s savings rate, help develop its capital markets and reduce the long-term strain on its budget.
“This acquisition continues our effort to find targeted, strategic acquisitions that strengthen our competitive position in the most attractive emerging retirement and long-term savings markets,” Zimpleman said in a statement. “Cuprum represents the sixth such transaction in the past two years and adds meaningfully to our fee-based earnings.”
Principal announced a deal in March to buy part of Brazil’s Claritas to expand in mutual funds and asset management after extending a retirement-product partnership with Banco do Brasil SA (BBAS3) in 2010. The firm agreed last year to buy Mexican pension provider HSBC Afore SA de C.V.
The Chilean system of individual pension savings accounts was created during the government of dictator Augusto Pinochet to replace a “pay-as-you-go” program. Similar pension systems have been started in countries including Russia, Peru, Colombia, Uruguay, Mexico, India and Poland, according to the website of the International Federation of Pension Fund Managers.
Chile requires workers to contribute a portion of their pay to a private retirement account, and people with more income can save additional cash in voluntary accounts. Principal will work to convince Cuprum customers to invest in the voluntary accounts it already offers, said Luis Valdes, president of Principal International.
“You have access to 600,000 clients where you have all the information that is needed in order to customize your value proposition for them,” he said by phone. “This is a tremendous competitive advantage going forward.”
Principal is paying about 1.76 unidades de fomento, Chile’s inflation-adjusted accounting unit, per share, or about 39,794 pesos, according to a statement posted on the website of Chile’s securities regulator.
Cuprum’s shares soared 40 percent to 36,765 pesos at the close in Santiago. The deal requires Empresas Penta SA and Inversiones Banpenta Ltda. to sell their 63 percent stake pursuant to a tender offer to include the remaining shares, Principal said.
Principal declined 2 percent to $27.21 at the close in New York. The acquisition uses capital that could have been spent to repurchase shares, John Nadel, an analyst at Sterne Agee & Leach Inc., wrote in a research note.
“We are disappointed in the initial accretion for PFG’s current shareholders,” he said, using the firm’s ticker symbol.
Principal’s final purchase price will be adjusted for a dividend of as much as about $130 million that Cuprum will pay to shareholders before the deal is completed. The U.S. firm expects to pay about $1.38 billion, Susan Houser, a company spokeswoman, wrote in an e-mail.
Moody’s Investors Service and Fitch Ratings said today that they may downgrade Principal’s credit rating as the acquisition increases leverage.
“The transaction is likely to weaken the group’s financial profile,” Moody’s said in a statement today. “Depending on the aggressiveness of the financing, there could be further downward pressure on the group’s rating.”
The deal may be completed in the first quarter, Principal said in the statement. It’s subject to approval by Chile’s securities and pension regulators, Zimpleman said. The acquisition may increase Principal’s per-share earnings by about 3 percent next year and 5 percent in 2014, according to a presentation on the company’s website.
Lazard Ltd. (LAZ) was Principal’s bank on the transaction. Cariola Diez Perez-Cotapos and Debevoise & Plimpton acted as legal counsel. JPMorgan Chase & Co. (JPM) provided Cuprum with financial advice, while Estudio Alcaino Rodriguez was legal representative.
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