Capital One’s $35.3 Billion Bid for Discover: Breakup Fees, Regulatory Hurdles, and Acquisition Dynamics

Capital One has put forth a significant takeover proposal for Discover Financial, which includes a substantial $1.38 billion breakup fee if Discover opts for another buyer. However, there is no such fee if U.S. regulators intervene and halt the deal, individuals familiar with the matter informed CNBC. Late Monday, Capital One announced an agreement to acquire its rival in the credit card sector, Discover, in an all-stock transaction valued at $35.3 billion.

While Discover is prohibited from actively seeking alternative offers, it retains the ability to consider proposals from other well-capitalized bidders before the shareholders vote on the proposed transaction.

U.S. banking regulators' role, Justice Department's potential intervention.
Regulatory scrutiny: U.S. banking regulators’ role, Justice Department’s potential intervention.

In the rare scenario where Discover chooses another offer, it would owe Capital One $1.38 billion. This aligns with the typical breakup fee in banking deals, which usually ranges between 3% and 4% of the transaction’s value, according to the sources.

Breakup fees serve as an industry practice intended to incentivize both parties involved in an acquisition to finalize the transaction. They can lead to substantial payouts if deals fall through, such as the estimated $6 billion paid by AT&T to T-Mobile after abandoning its 2011 takeover attempt due to opposition from the U.S. Department of Justice.

Observers of the Capital One agreement are closely monitoring whether U.S. banking regulators will approve the deal. In recent years, regulators have blocked various deals across industries on antitrust grounds, and securing a transaction during an election year in a climate deemed unfriendly to bank mergers is seen as uncertain.

Breakup fees in banking deals, implications of alternative proposals.
Industry dynamics: Breakup fees in banking deals, implications of alternative proposals.

Neither party would be obligated to pay a breakup fee if regulators intervene and prevent the acquisition, which is reportedly customary in banking deals. However, last year, Canadian lender TD Bank agreed to pay $225 million to First Horizon after their takeover fell apart amid regulatory scrutiny of the larger firm.

During a conference call on Tuesday, Capital One CEO Richard Fairbank addressed concerns about the “intense regulatory backdrop” surrounding the deal, expressing confidence in approval. Fairbank stated that the companies have maintained communication with their regulators.

For the deal to proceed, Capital One must obtain approvals from the Federal Reserve and the Office of the Comptroller of the Currency. Additionally, the Justice Department retains the authority to comment on the acquisition and can potentially litigate to block it. The agreement came about after Capital One initiated discussions with Discover and did not involve an extensive search for all potential bidders, according to one of the sources.

Sajda Parveen
Sajda Parveen
Sajda Praveen is a market expert. She has over 6 years of experience in the field and she shares her expertise with readers. You can reach out to her at [email protected]
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