BlackRock ( BLK ), the world's largest publicly traded asset management firm, recently agreed to buy back Bank of America's remaining 7% stake in the company for about $2.5 billion. The transaction involves an exchange of 13.6 million Series B convertible preferred shares at $187.65 per share, which is at a 3.6% discount to the average closing price for the 15-day period prior to the announcement. BlackRock plans to fund the purchase with the available cash and $2 billion of commercial paper, medium-term and long-term debt.
In 2006, Merrill Lynch sold its asset management division to BlackRock for a 49.8% stake in the latter. Bank of America came to acquire a 34% stake in BlackRock through Merrill Lynch's purchase during the financial crisis in 2008. In November 2010 Bank of America sold around 34.5 million shares in a secondary sale, only this time BlackRock chose to buy back Bank of America's remaining stake in the company. We value BlackRock with a $205 Trefis price estimate of its stock.
What could be the rationale behind the transaction?
Asset management is not considered strategic to Bank of America's core business in retail banking, home lending and capital markets. The proceeds from the sale could help Bank of America resolve the mounting claims tied to defective home loans from mortgage buyers, insurers and regulators as a result of the purchase of Countrywide Financial Corp in 2008.
What impact to BlackRock's stock?
Although BlackRock's debt burden will increase, the size of the share purchase is within limits to not alter BlackRock's credit rating, and so payments on the additional debt will provide a partial tax shield and lower the cost of capital for BlackRock. We expect the transaction to have negligible impact on BlackRock's stock since it only restructures BlackRock's balance sheet, and share buybacks often send a positive signal to the market that management is confident on the direction of the stock and ability to generate cash for future needs.