Bank of America/MBNA Deal Boosts Capital One

Credit card companies have been hot acquisition targets lately. The sale of Providian (PVN) sparked speculation that more deals would follow as independent card companies aren’t very plentiful. Today’s announcement that Bank of America (BAC) will buy MBNA (KRB) for $35 billion only furthers that thesis.

MBNA is getting a very nice premium, with the purchase price of $27 being about 30% above the stock’s $21 closing price yesterday. B of A is paying 13.5x MBNA’s 2005 EPS estimate of $2.00 per share. Such a price has resulted in a repricing of other credit card firms in the market. Longtime Peridot favorite Capital One (COF) is rallying $5 per share (7%) today. With Providian and MBNA now out of play, COF is the last remaining large credit card company without a merger partner.

The 13.5x multiple for KRB implies that COF shares remain undervalued. Capital One should earn $7 this year, making a implied buyout value of $95 per share, versus its $74 closing price yesterday (shares are up to $79 this morning). While the speculation today will be that COF will be next in line to get a bid, I seriously doubt they are interested in selling. Nonetheless, the stock remains both undervalued and a Peridot core holding even as they remain independent.

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5 Thoughts on “Bank of America/MBNA Deal Boosts Capital One

  1. Anonymous on June 30, 2005 at 8:15 AM said:

    I bought shares of KRB when they got hit by the lower receivables issues in Q1. I thought they were oversold then, especially for a pretty defensible franchise. While I wasn’t betting on them getting acquired, I did think the relatively low enterprise value made it a possibility. For my trouble, I have a 35% return in three months. On the other hand, I don’t think the Providian sale makes CapOne a likely seller. PVN’s funding sources were getting choked by the OCC (lower dealer deposits, junk rated debt), all that was left was securitizations, which is not a great long-term strategy. They needed a real bank for funding, rather than their two branch operation in NH holding their charter. CapOne actually has a real bank, although not as big as they might like. If Wachovia v. BofA is like First Union v. BofA, maybe Wachovia buys it for spite (and because they lost the MBNA battle).

  2. Chad Brand on June 30, 2005 at 8:29 AM said:

    As I said in the piece, I do NOT think COF will be acquired. They have a strategy they are implementing wonderfully and it doesn’t include being bought out.

    The Providian deal did further reduce the number of potential credit card acquisition targets, which undoubtedly sped up the process for MBNA to receive an offer from BAC, a company that loves to do big deals.

  3. Anonymous on June 30, 2005 at 9:51 AM said:

    Missed the serious doubt (sorry). However, I am very happy that BAC loves to do big deals, often one (MBNA) on top of another (Fleet). For the record, Providian spends a lot of time wondering what CapOne is up to. I don’t understand why, since I think CapOne works in a slightly different niche, and actually tries branding, instead of straight promotion. But that’s me.

  4. Anonymous on June 30, 2005 at 12:16 PM said:

    Don’t forget about the increased ratings MBNA will get to pick-up as a result of the deal. With billions being securitized annually (and BOAs existing issuance channels), it could be more than insignificant…

  5. Dapper Dan on July 1, 2005 at 10:43 AM said:

    Forget the takeout premium. COF has just gotten rid of their pureplay competition. If they maintain their credit standards, this is a layup in the long run. Neither Wamu nor BAC have been known to extract much value out of their prior acquisitions; I’m not sure why the pattern would change in this case.

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