BlackRock will pay $187.65 per share, or $2.54 billion, for the 13.6 million Series B convertible preferred shares owned by Bank of America. The bank is getting a sweeter payday than when it sold an initial block of its BlackRock shares on the public market in November for $163 each.
By buying back the huge block of shares that Bank of America held on its balance sheet, the deal allows BlackRock to reduce its total share count without reducing its public float, or the amount of shares that can be freely traded every day.
BlackRock, which went public in 1999, was just added to the Standard & Poor's 500 Index in April after its public float finally exceeded the required 50 percent threshold.
The deal will likely increase BlackRock's earnings per share by about 3 percent, Nomura analyst Glenn Schorr wrote in a report. He increased his 2012 EPS estimate to $14.50 per share from $14.05 as a result.
Shares of BlackRock, which oversees $3.6 trillion in assets, rose 2 percent to $197.25 in morning trading on the New York Stock Exchange. Bank of America shares dropped 4 cents to $11.75.
For Bank of America, the deal raises cash that can be put to work expanding other businesses and avoids hefty capital charges the bank would have been required to set aside against the BlackRock position under the new Basel III rules.
The announcement comes just six months after the bank announced it would slash its ownership in the asset manager by selling a large portion of its BlackRock stake on the open market.
Bank of America acquired the shares when it bought Merrill Lynch in 2008 amid the depths of the financial crisis. Merrill got the shares in 2006 when it swapped its entire fund business to BlackRock for a 49.8 percent stake valued at the time at $9.4 billion.
Bank of America spokesman Jerry Dubrowski said the move is consistent with the bank's strategy to sell business units and investments that do not serve its core customers.
We determined we didn't need the equity investment in that partnership to continue the working relationship we have, Dubrowski said.
The deal does not sever all ties between the companies, BlackRock said, noting that Tom Montag, who heads Bank of America's Global Banking and Markets Group, will remain a member of BlackRock's board of directors.
The New York-based asset manager, whose clients include central banks and governments, will use available cash and $2 billion of commercial paper, medium-term and long-term debt to pay for the preferred shares.
This stock repurchase and our recent dividend increase (are) evidence (of) our continued commitment to enhancing shareholder value through effective use of our significant free cash flow, while maintaining our strong liquidity and capital position, BlackRock Chairman and Chief Executive Laurence Fink said in a statement.
(Reporting by Svea Herbst-Bayliss and Joe Rauch, editing by Maureen Bavdek, John Wallace, Dave Zimmerman)