ING to buy CitiStreet for 578 million euros

AMSTERDAM/NEW YORK (Reuters) - Dutch financial services group ING Groep NV ING.ASING.N said on Friday it would buy retirement plan administrator CitiStreet, making it the third largest U.S. defined contribution business.

ING said it would pay 578 million euros ($903 million) for the company, which is jointly owned by Citigroup C.N and State Street STT.N.

“It gives us a much more expanded footprint,” Kathleen Murphy, chief executive of ING US Wealth Management, told Reuters.

“Because they serve such a large part of the defined contribution market they have $10 billion in rollover opportunities every year,” Murphy said. “If we can recapture those into ING products over time, there is real revenue growth opportunity.”

ING said the acquisition will boost earnings per share by 2010, excluding merger-related expenses and amortization of customer-based intangible assets.

“Roughly 30 percent of the purchase price is attributable to the operational synergies from the combined operation,” Murphy said. “I think there will be some redeployment and elimination of some redundant positions.”

The combined operations of ING and CitiStreet will make it the third-largest defined contribution business in the United States with 224 billion euros assets under management and 14 million plan participants, ING said.

Lehman Brothers analyst Nick Holmes said at first glance the acquisition may make sense strategically, but it did not look cheap.

He said ING has indicated that the acquisition’s target return on investments is at least 10 percent after 3 years, rising to 12 percent after 5 years, both of which are below ING’s current group return on equity.

“We imagine that ING is hoping for higher returns than these in the longer term derived from gaining access to CitiStreet’s customer base,” Holmes said in a client note.

The move came as Citigroup seeks to dispose non-core assets, after taking more than $46 billion of credit losses and write-downs since the end of June, and losing close to $15 billion in the last two quarters. Since late last year, Citigroup has raised more than $40 billion of capital.

ING was advised by Lazard, while Citi was advised by its institutional clients group and State Street by Goldman Sachs.

On the New York Stock Exchange, ING edged down 19 cents to $38.58, Citi rose 40 cents to $26.39, and State Street slid 21 cents to $75.05 at mid-afternoon.

Reporting by Harro ten Wolde, additional reporting by Paritosh Bansal in New York; Editing by David Cowell, Jason Neely, Richard Chang