Standard & Poor’s has lowered its ratings on Nationwide Mutual Insurance Co. and related entities. At the same time, S&P removed these ratings from CreditWatch, where they had been placed on March 30 with negative implications. The outlook is negative. These ratings actions followed Nationwide’s announcement that is has completed its acquisition of Gartmore Investment Management Plc., an asset management subsidiary of Royal Bank of Scotland Group PLC, for about $1.6 billion in cash.
The rating actions reflect the transaction’s dilutive effect on Nationwide’s earnings and capital adequacy. Management financed the transaction through the liquidation of marketable securities held on Nationwide’s balance sheet. The resulting impact on Nationwide will be a temporary loss of earnings and a $1.5 billion write-off of goodwill associated with the purchase price.
The expected decrease in Nationwide’s operating earnings would be caused by the substitution of investment income generated by investments in marketable securities for dividend income received from Gartmore. As a result, management’s ability to realize anticipated synergies from Gartmore will be a critical factor in making this transaction accretive to earnings. Equally important will be the impact on capitalization.
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