Fifth Third Bancorp (FITB) has revised its estimates of gain from Vantiv Inc.’s (VNTV) initial public offering. The company now expects an additional pre-tax gain of $17 million in the first quarter of 2012 which is over and above the $95 million that the company had earlier projected.
U.S.-based Vantiv was formerly known as Fifth Third Processing Solutions (FTPS). FTPS is a payment processing company dealing with more than 12.9 billion payment transactions valued at $426 billion annually. Fifth Third had spun-off FTPS in 2009 after which a joint venture was initiated between Advent International and Fifth Third Bank, a subsidiary of Fifth Third. The company was named Vantiv in June 2011.
Notably, Vantiv Inc. opted for an initial public offering of Class A shares on the company. The offering was completed on March 21, 2012 and raised $500 million at an average price of $17 per share.
However, the underwriters for Vantiv fully exercised their option to purchase an additional 4,411,800 shares of Vantiv Inc. Class A common stock at the public offering price of $17.00 per share. Part of the proceeds was used by Vantiv to purchase 2,086,064 Class B units of Vantiv Holding LLC from Fifth Third. This will result in the cancellation of an equivalent number of shares of Class B common stock of Vantiv held by Fifth Third.
This action of purchase pursuant to the option will fetch Fifth Third around $17 million in pre-tax gain and approximately $11 million after-tax in the first quarter of 2012. Hence the total gain will stand at $112 million pre-tax and $71 million after-tax. Moreover, as a result of such actions Fifth Third’s remaining economic interest will reduce to approximately 39% of Vantiv’s future earnings.
Fifth Third continues to hold 83.9 million Class B units of Vantiv Holding LLC. These shares are exchangeable for Class A Common Stock of Vantiv Inc. on a one-for-one basis coupled with a warrant, which can be exercised and exchanged into Vantiv Inc. Class A Common Stock. These securities are dependent on certain conditions and restrictions.
Of late, Fifth Third has received assurance from Federal Reserve that declared that it does not have any objection to the capital actions of Fifth Third including a continuation of its quarterly common dividend of 8 cents per share and redemption of up to $1.4 billion in certain trust preferred securities.
The Fed has not raised objections to the company’s strategy of repurchasing common shares at par with any after-tax gains realized by Fifth Third from the sale of Vantiv Inc. common shares by either Fifth Third or Vantiv.
Going forward, we believe that a diversified traditional banking platform positions Fifth Third well for future growth. Though a tepid economic recovery, a low interest rate environment as well as regulatory changes remain headwind, we think that the company’s proactive steps will help navigate it through these.
Fifth Third currently retains a Zacks #3 Rank, which translates into a short term Hold rating. Considering the fundamentals, we are also maintaining a long term Neutral recommendation on the stock.
FIFTH THIRD BK (FITB): Free Stock Analysis Report
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