3rd UPDATE: BlackRock To Buy Remaining BofA Stake For $2.55 Billion

BlackRock Inc. (BLK) will buy out the remaining stake that Bank of America Corp. (BAC) held in the world's largest money manager for about $2.55 billion, the two companies said Thursday, giving BlackRock more control of its own company and the bank a capital boost.

The buyout ends a five-year investment, started when Merrill Lynch & Co. first took a massive stake in the money manager, accelerating BlackRock's rapid growth.

For Bank of America, which acquired the stake with its 2009 purchase of Merrill, the deal is the latest in a series of divestitures that the nation's largest bank by assets said are helping it to narrow its focus.

The move will also likely provide a lift to Bank of America's capital position, which came under scrutiny from investors after the bank disclosed the Federal Reserve had objected to its capital plan earlier this year. The bank has said the plan was rejected but didn't explain why. It plans to resubmit the plan later this year, noting it had always said the goal was for a second-half "modest" dividend increase.

Bank of America had been carrying the investment on its books at $2.2 billion, meaning it should record a pre-tax gain of around $350 million.

The Fed's rejection has been a key reason why the bank's stock has slumped 20% over the past three months. Shares slipped 0.7% to $11.71 in recent trading.

For BlackRock, which rose 2.6% to $198.325 in recent trading, the deal frees it from the bank's investment.

A BlackRock spokesman said the transaction will be "immediately accretive," with the reduction in dividend payments more than covering the expected interest-rate costs associated with financing the buyback.

BlackRock said the share repurchase will be funded with available cash and a total of $2.0 billion of commercial paper, medium-term and long-term debt.

Nomura analyst Glenn Schorr estimated BlackRock's earnings in 2012 and 2013 will rise 3%, given the lower share count. He raised BlackRock's target price to $232 from $225.

There will be no change to the money manager's dividend rate because of the buyback, the spokesman added. BlackRock in February raised the quarterly dividend rate 38% to $1.38 a share.

A spokesman for the bank said the decision to exit fully was mutual, as BlackRock had approached Bank of America about the purchase and the bank agreed.

Analysts initially said the repurchase was positive for BlackRock as it removes one major overhang on share price, after Bank of America and PNC Financial Services Group Inc. (PNC) sold big portions of their ownership in the New York firm in November.

One analyst, who declined to be named, said it is unlikely that PNC, which owns a 25% stake in BlackRock, will further sell down its holding.

PNC said in a statement that it does "continually monitor" investments but "considers BlackRock an extremely valuable and trusted business partner."

Barclays PLC (BCS,BARC.LN) owns a 19.9% economic interest in BlackRock, including both common and preferred shares. Barclays got the stake in December 2009, having sold its asset-management unit Barclays Global Investors to the money manager.

Nomura's Schorr said BlackRock has the financial strength to "possibly repurchase Barclays stake in the firm if and when Barclays decides to sell."

A BlackRock spokesman said, "We are aware of the announcement by BlackRock regarding its proposed buyback of the Bank of America Merrill Lynch stake in Blackrock and are reviewing the situation. Our strategic relationship with BlackRock remains unchanged."

Under the deal announced Thursday, BlackRock would buy back Bank of America's nearly 13.6 million series B convertible preferred shares for about $187.65 each, a 2.9% discount to Wednesday's close. Bank of America had already sold some 51.2 million shares of BlackRock last year in a public offering, which priced at $163 a share.

The two said their strategic partnership will continue even without the investment, and Bank of America's investment-bank head, Thomas Montag, will remain on BlackRock's board. The 2006 deal was seen as a way for BlackRock to grow in stature, expanding its reach into stock-market mutual funds, which it acquired from Merrill, while also getting widespread distribution of its funds by what was known as the Thundering Herd of Merrill brokers.

-By David Benoit and Amy Or, Dow Jones Newswires;

212-416-2458 david.benoit@dowjones.com;

--Matt Jarzemsky contributed to this article.

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