DES MOINES, Iowa — Principal Financial Group Inc. said Wednesday that it has agreed to sell its mortgage banking business to Citigroup in a deal worth $1.26 billion.
Under the agreement, Citigroup will acquire the stock of Principal Residential Mortgage Inc., and its mortgage employees will transfer to Citigroup.
The transaction has been approved by Principal's board of directors and is expected to close in the third quarter, subject to regulatory approval, the company said.
In trading on the New York Stock Exchange, Principal Financial shares climbed $2.40, or more than 7 percent, to close at $34.73. Citigroup shares rose 62 cents, or more than 1 percent, to close at $46.31.
"This is a great outcome for The Principal, mortgage customers and employees, and for Citi," J. Barry Griswell, chairman, chief executive and president of Principal Financial Group, said in a statement.
He added: "The Principal intensifies its strategic focus on its core retirement and risk protection businesses, customers continue to receive high quality and responsive service and Principal Residential Mortgage employees join a respected consumer financial services organization."
Griswell said the move will allow the company to "go forward from an improved capital position, with better financial flexibility and greater stability of earnings."
Citi, the nation's largest financial institution, is headquartered in New York.
Principal expects that the transaction initially will reduce operating earnings per share by approximately 8 cents to 10 cents per quarter, based on estimated normalized quarterly earnings for the mortgage business.
The company expects after-tax net proceeds of about $710 million, which it will use primarily for growth of its core businesses, strategic acquisitions and share repurchase.
In a separate announcement Wednesday, the company said its board has authorized the repurchase of up to $700 million of the company's outstanding common stock. The company has completed approximately $253 million of the $300 million share repurchase program authorized by the board in May 2003.
Jason Zucker, an analyst with investment bank Fox-Pitt, Kelton, said the biggest positive of the deal is the influx of cash.
"In essence, the company is selling the mortgage banking business to buy back stock," Zucker said in a statement.