Capital One Financial Corp. has agreed to buy HSBC Holdings Plc’s domestic credit card business for a premium of about $2.6 billion, the US-based financial holding company said Wednesday.
As per the definitive agreement between the two companies, Capital One will acquire HSBC’s US credit card business, including its $30 billion credit card portfolio, for an 8.75 percent premium to par value of all receivables. As of June 30, 2011, the premium would have totaled $2.59 billion.
This will be Capital One?s second major deal with a European firm in as many months. It follows the firm?s?agreement in June?to buy the American online banking operations of?ING Group?of the Netherlands for $9 billion.
The deal includes ongoing private label and co-branded partnerships along with infrastructure and capabilities that will boost Capital One’s partnership platform. The combination is expected to enhance Capital One’s existing franchise and scale in the Domestic Card business.
Richard Fairbank, Chairman and Chief Executive Officer of Capital One said, “The acquisition of HSBC’s domestic credit card business is an attractive strategic and financial opportunity in a business we know well. Adding the HSBC card business to our own will enhance our credit card franchise and accelerate our achievement of a leadership position in retail card partnerships.”
HSBC had already announced that it was considering shedding non-core consumer operations and assets as part of a $3.5 billion cost-trimming effort. Last week, the British bank announced plans to?lay off 30,000 employees.
It also said that it was?selling 195 bank branches, mostly in upstate New York, to the?First Niagara Financial Group?for about $1 billion.
While the auction of the HSBC card business had attracted other potential suitors, like?Wells Fargo, bankers considered Capital One the most likely buyer. The 23-year-old firm began life as a credit card lender, and it remains one of the biggest purveyors of such services to customers with less-than-ideal borrowing histories.
HSBC had announced in May that it was conducting a strategic review of the US credit card and retail services arm.
HSBC acquired the US credit-card unit in 2003 as part of its $15.5 billion acquisition of subprime-mortgage lender Household International, which is currently known as HSBC Finance. The bank reportedly halted consumer-finance lending at the unit in 2009, which has contributed to about $60 billion of provisions in North America.
Although around $30 billion of HSBC credit card loans are expected to be added, the company does not expect a significant increase in total assets. Capital One expects to fund HSBC credit card loans primarily with cash and the proceeds from the balance sheet repositioning related to the pending ING Direct acquisition.
Capital One benefits
Capital One?s takeover of the ING banking operations was meant in part to further bolster mainline banking operations. But the deal also furnished the firm with more deposits that it can use as a source of funds for lucrative acquisitions.
Analysts at?Barclays?Capital wrote in a research note published after the ING deal that if the firm were to buy the HSBC portfolio, it could raise its earnings per share by 10 percent or more.
Capital One has already benefited from an improving environment for credit card lenders, including fewer charge-offs and lower funding costs. Its card unit more than doubled its profit last year, to $2.3 billion.
HSBC was advised by?JPMorgan Chase. Morgan Stanley, Centerview Partners and the Kessler Group were advising Capital One.
Capital One expects its Tier 1 common ratio to be in the mid-9 percent range at the end of the second quarter and estimates to raise around $1.25 billion in capital. The company also has the option of issuing $750 million of the $1.25 billion to HSBC at $39.23 per share, the average of the closing prices of Capital One shares on August 8 and 9.
In connection with the transaction, the company expects to realize cost synergies of around $350 million and estimates to incur restructuring costs of around $420 million.
COF closed Tuesday’s regular trade at $40.82, down $3.19 or 8.48 percent, on 13.17 million shares. The stock fell 4.36 percent to $39.04 in extended trading.
HSBC Mena performance
Earlier this month, HSBC announced their first half results and the figures show a promising performance for the second half. Globally, HSBC made a profit before tax of $11.47 million (Dh42 million) an increase of 3.3 per cent compared with the first half of 2010.
HSBC’s operations in the Middle East and North Africa (Mena) reported a profit before tax of $747 million (Dh2,743 million) up 116 per cent compared to the $346 million (Dh1,270 million) reported in the first half of 2010.
“Our focus markets put in a strong performance, with Egypt profit rising by 45 per cent, UAE by 110 per cent, and Saudi by 71 per cent compared to the first half of 2010,” said Simon Cooper, CEO of HSBC Middle East and North Africa.
In the Mena region, the UAE was the biggest contributor to the bank’s bottom-line. While the UAE operations reported $265 million (Dh972 million) pre-tax profits up by 33 per cent reported in the first half of last year, commercial banking and global banking contributed 120 million and 119 million respectively to the bank’s first half profits in the UAE.
Saudi Arabia and Egypt were the other major contributors to HSBC’s profits in the region. While Egypt accounted for $113 million (Dh414 million) marginally down from $117 million (Dh429 million) in the same period last year, Saudi Arabia’s contribution improved from $107 million (Dh392 million) in the first half of last year to $183 million (Dh671 million) during the first half of this year.
HSBC Holdings said early this month that it was slashing around 30,000 jobs to cut costs and revamp its business as part of plans to withdraw from some countries and refocus its operations on high-growth markets. The selling off of its U.S. credit card business is just the first step in this refocusing attempt.
On top of 5,000 jobs already under the axe in the US, UK, France, Latin America and Middle East, around 25,000 further roles will be cut between now and 2013, Group Finance Director Iain Mackay told reporters earlier this month.
Sources: nytimes, rttnews, FT, Gulfnews