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Founded with the aim of fending off the market concentration in the Brazilian financial services industry, NASDAQ-listed Brazilian brokerage firm XP is pressing ahead with its market consolidation strategy. A few days after acquiring a minority stake in investment information provider Suno, the broker announced it is wholly acquiring investment banking firm Banco Modal.

The transaction, which took the market by surprise, will be paid for with up to 19.5 million newly issued Class A shares or XP Brazilian Depositary Receipts (BDRs), certificates representing shares of foreign companies traded in Brazil. This represents a 35% premium over the average price of Banco Modal’s shares on the stock exchange over the last 30 days. The parties will conduct the transaction through a corporate reorganization that will result in the incorporation of up to 100% of Modal’s shares through an XP subsidiary.

Considering the closing value of XP’s BDR on Thursday (6) of BRL 153,98 (USD 27,83), the transaction values ​​Banco Modal at BRL 3 billion (USD 540 million). The value is 50% greater than the BRL 2 billion that the bank’s shares value on Thursday on B3, the Brazilian Stock Exchange.

If XP fails to secure approval of its minority shareholders, it will incorporate an interest equivalent to 55.7% of Modal‘s share capital held by its controlling shareholders in a share transaction. In a statement, XP also says that it will guarantee all Banco Modal‘s minority shareholders the right to sell their stake under the same conditions. Its shareholders include Credit Suisse, which has a 15.8% stake in Modal and was one of the supporters of its IPO last year.

Modal had been growing as the third most relevant challenger in the Brazilian investment market, presenting itself as an alternative to leading players XP and BTG Pactual. Modal even took a note from the competitors’ book by mimicking the strategy of buying off independent agents to expand its client portfolio. Another move underway was the creation of a bank-as-a-service offering with the purchase of payment technology firm Live On.

Financial industry disruption

Despite representing a small (but growing) share of the market in which they operate, XP and Banco Modal are set to accelerate the process of disruption that has been going on in the financial industry in Brazil.

By September 2021, both companies had approximately 3.8 million active customers, while the five largest Brazilian banks had 457 million total customers with banking relationships and 175 million customers with active credit operations. In terms of net revenue, XP and Banco Modal added up to BRL 11.8 billion (USD 2.1 million) against BRL 27 billion (USD 4.8 billion) generated by the five banks in the last 12 months up to September.

In the third quarter of 2021, XP reached BRL 789 billion (USD 142 billion) in assets under custody, up 40% on the same period in 2020, when they arrived at BRL 563 billion (USD 101 billion). Modal, on the other hand, totaled BRL 30.4 billion (USD 5.4 billion) in assets, a jump of 116.8% in 1 year.

According to XP‘s chief financial officer, Bruno Constantino, the brokerage’s ecosystem has demonstrated its ability to cross-sell. “Given the immaterial overlap between XP and Banco Modal customers, we expect there will be revenue synergies and customer experience improvements to be captured,” the executive said in a statement. Constantino added that the company hopes to continue to bring benefits to its customers by lowering prices, as it has recently done with online brokerage fees.

Banco Modal‘s president, Cristiano Ayres, expressed confidence in the business model synergies between the companies and in the opportunities for growth and profitability that both firms will achieve in the long term. “Everything we envisioned for Modal will now get bigger and move even faster with XP,” he noted.

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