Itau Unibanco (ITUB) Reveals Plan to Spin Off Investment in XP

Itau Unibanco Holding S.A. ITUB announced that its board of directors has given consent for plans to spin off investment in XP (NASDAQ:XP) Inc. into a new company — Newco. The company had put forth this idea on Nov 3, 2020, post which, its shares have gained about 33%.

Itau Unibanco will be spinning off companies of the Itau Unibanco conglomerate and the spun off portion would represent 41.05% of the capital of Investment in XP. This portion will be transferred to Newco.

The lender also informed that the spin-off shall be the subject of discussion in the general meeting of shareholders. Notably, post approval, the shareholders of Itau Unibanco will be entitled to have an equity holding in Newco, whose sole asset will be the Investment in XP.

Itau Unibanco plans to divest the outstanding shares of XP, about 5% of the capital stock of of the company, as previously advised, depending on market conditions. The company plans to use proceeds from this investment to increase Basel III common equity tier I capital.

Brief Background on XP Deal

Announced in May 2017, Itau Unibanco had entered into a share purchase agreement with XP Investimentos S.A. (XP Holding), a Brazil-based brokerage firm. Post acquisition, Itau Unibanco was entitled to 49.9% of the total share capital, which made it a minority shareholder of XP Holding.

In August 2018, it received consent from the Central Bank of Brazil to execute the investment. Also, Itau Unibanco signed a concentration control agreement promising the Central Bank of Brazil that it will make no move to acquire the control of XP Holding for a period of eight years.

Itau Unibanco acquired 49.9% of the total share capital of XP Holdings through a capital increase of R$600 million and the acquisition of shares issued by XP Holding that were held by the above-mentioned parties for a total of about R$5.7 billion.

Our Take

The company’s focus on expanding business in Brazil and internationally is reflected in its recent active involvement in acquisitions. However, elevated expenses and stressed conditions in Brazil keep us apprehensive.

Shares of Itau Unibanco have lost 28.1% over the past six months compared with 30% decline of the industry.

Currently, the stock carries a Zacks Rank #4 (Sell).

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