Monday, March 13, 2006

Capital One to Buy North Fork for U$14.6 Billion

Cash and Stock Deal Marks Push Into Traditional Banks, Cutting Credit-Card Risk

The Wall Street Journal, Dennis K. Berman & Robin Sidel, 13 March 2006

Capital One Financial Corp. agreed to buy North Fork Bancorp for $14.6 billion in cash and stock, accelerating the large credit-card issuer's push into the traditional banking business.

The deal, which the companies disclosed last night, underscores the difficulty that regional banks are facing as they cope with a tricky interest-rate environment and an extremely competitive battle for deposits. North Fork, which is a large regional New York bank, has performed fairly well under current market conditions but is battling with other banks that are expanding in its home turf.

"It is difficult for regional banks to grow at this time," said John Kanas, chief executive of North Fork. North Fork has assets of about $60 billion and operates more than 355 branches in New York, New Jersey and Connecticut. It also has a mortgage business.

Terms of the deal call for North Fork shareholders to receive $11.25 in cash and 0.2216 of a Capital One share for each North Fork share. Based on Capital One's Friday share price of $89.92 on the New York Stock Exchange, the offer is valued at $31.18, representing a premium of 23% to North Fork's trading price of $25.40 Friday on the Big Board.

The deal is the latest move by Capital One -- known for its deadpan television commercials promoting its credit cards -- to reduce its reliance on plastic. In recent years, under Chairman and Chief Executive Richard D. Fairbank, it has expanded into other areas, such as auto lending, and last year it bought Hibernia Corp., a bank based in New Orleans, for about $5 billion. In part, that is because profit growth in the credit-card business is slowing due to competition among issuers who are luring customers with zero-percent balance transfers and lucrative rewards programs.

Furthermore, by owning a bank, the McLean, Va., company can fund its lending business more cheaply by tapping the bank's deposit base than by relying on potentially volatile capital markets. After the deal, slightly more than half of Capital One's earnings will come from cards. Nearly 90% of its earnings came from cards as recently as 2003.

"We are very strong believers in the power of national lending and local banking," said Richard Woods, a spokesman for Capital One.

A prospective takeover of North Fork has long been discussed in banking circles. Mr. Kanas, 59, is a fixture in the industry, and as part of the deal will run all of Capital One's banking operations.

Like other regional banks, North Fork has been grappling with a flat or inverted yield curve, resulting in narrower difference between long-term and short-term interest rates. That creates a difficult situation for the banking business, which borrows money at short-term rates and lends it at long-term rates -- typically making a profit on the spread between the two.

North Fork decided to pursue a sale after determining that the bank would continue to get squeezed by the situation, Mr. Kanas said. "In the current economic environment, it is hard to imagine that yield curve will improve any time soon."

The transaction is expected to close in the fourth quarter of this year. Capital One said it expects to repurchase about $3 billion of its shares after the transaction is completed. The company said it expects pretax savings of $275 million from the deal by 2008.

Last year, North Fork had net income of $948.8 million, or $2.01 a share. Capital One had net income of $1.81 billion, or $6.73 a share, over the same period.