Banco Popular de Puerto Rico, a subsidiary of Popular Inc., completed its acquisition of certain assets and assumption of certain liabilities used by Evertec Group LLC, a subsidiary of Evertec Inc., to service certain channels of Banco Popular de Puerto Rico.
As a result of the completion of the deal, Banco Popular de Puerto Rico acquired certain critical channels from Evertec Group, including the bank's retail and business digital banking and commercial cash management applications, according to a news release. Popular added about 165 Evertec employees and contractors supporting the servicing of the acquired assets.
Additionally, Banco Popular de Puerto Rico entered into amended and restated service agreements with Evertec Group, pursuant to which Evertec Group will keep providing IT and transaction processing services to Popular, Banco Popular de Puerto Rico and their respective subsidiaries. The agreements are expected to reduce service costs due to discounted pricing and lowered caps on contractual pricing escalators tied to the consumer price index.
As part of the deal, Banco Popular de Puerto Rico strengthened its relationship with Evertec in the payments business, including through the incorporation of a revenue-sharing structure for the bank in relation to its merchant acquiring relationship with Evertec.
As consideration, Banco Popular de Puerto Rico delivered to Evertec Group 4,589,169 shares of Evertec's common stock valued at $169 million at closing, based on Evertec's June 30 stock price of $36.88, resulting in an after-tax gain of about $112 million.
The financial benefits of the transaction during the first full year are expected to be offset because of the elimination of Popular's earnings from its investment in Evertec. However, the financial effect of the deal is expected to be accretive during future years due to incremental merchant acquiring revenue sharing income and future price reductions in continuing services, among other things.
On the capital front, the transaction leads to a negative impact of approximately $55 million in Popular's tangible book value as a result of the net effect of the after-tax gain of the Evertec shares used as consideration for the transaction, minus about $167 million in goodwill and other intangible assets recognized by Popular in connection with the deal and the effect of adjustments related to purchase accounting.
Because of the transfer of the shares used as consideration for the transaction, Popular's ownership stake in Evertec was decreased to approximately 10.6% from 16.3%. Popular also agreed to further cut its voting interest in Evertec to no more than 4.5%, either by a sale of Evertec common shares or conversion of such shares into nonvoting preferred stock within 90 days of the closing of the transaction.
The subsequent reduction of Popular's voting interest in Evertec will lead to $177 million in after-tax gains as a result of mark-to-market accounting, assuming a value per share of $36.88, Evertec's share price on June 30. Popular plans to return any after-tax gains resulting from such sale to shareholders via common stock repurchases, subject to the receipt of regulatory approvals.
Assuming Popular reduces its remaining stake in Evertec to 4.5% via sale and deploys the resulting after-tax gains to execute common stock repurchases, the aggregate pro forma impact of the transaction, the effect of mark-to-market accounting on the remainder of Popular's stake in Evertec and the execution of the contemplated share repurchase would result in an accretion of 16 cents in EPS and $1.64 in tangible book value per share during 2023.
