Chillin' out till it needs to be funded
Do pick up the next deal tab for Capital One as they dig into HSBC Credit Cards’ large $30 bln portfolio..
But then it’s just publicity as a strategy
Capital One is carpet bombed over the networks as it decided to go public with its news of a bid for HSBC Card Assets. Given that the assets are worh $33 billion and no part sales are planned, the US specialist card issuer will have already lined up external funding for the bid.
It’s a lot of cash to pay for someone else’s card portfolio but the stakes could be worth it for any other new entrant as well. With GE its competitor on the ING Direct bid, Cap One can expect 3-4 bidders to play out the HSBC bid too. Also Cap One could end up with nothing as even though it is the smart one with Cards and retail banking experience under the belt it is looking for a large stock swap component that could even make it a non starter for someone leaving the shores.
ING’s sub prime portfolio is already beholden to the Dutch government for the remaining $ 3 billion Euro in aid, and HSBC may not be looking for any partners in its HHI portfolio. Though HSBC also expects HAMP action from the regulators, its $18 bln mortgage portfolio is not the same urgency as the cards and retail loans ( Auto: $4.5 bln) and it would definitely not want to own Cap One stock if it is looking for a good focus in new markets and existing investments. HSBC has also been bringing down LV’s to under 80% on its mortgages in other geos. That business could fetch quite a premium and HSBC should not be in a hurry to bundle it with any other sale.
Minus mortgages, a Card portfolio should definitely not fetch too much of a premium and chances of a great valuation touchdown for Cap One brighten quite a bit even if it is $33 bln. Also as The Street avers and intelligent comment starts pouring in on the proposed bid, Cap O
ne might just stop the run on its stock from the news of a stock swap worth $5 bln for ING. The HSBC bid makes a little dent on the risk Cap One is carrying in its attriting Card portfolio as Card spends remain stuck in a downward trajectory this decade ( though they have managed to say up 1-2% in some quarters last 3 years)
It’s still too much ambition
And, its competition would be other conglomerates like GE with card specialists having been left out when MBNA was added to Bank of America back in 2005. Interestingly, HSBC bought this card portfolio around the same time from one of the Tier II/III sub-prime lenders called Metris. CapOne’s biggest competitor now, BofA is fast losing the plot on Credit Cards too after the CARD Act it backed and high default rates cost it 17.6% reduction on Card Income in the first quarter
Cap I’s popular income boosting strategies have included selling multiple cards to susceptible borrowers for the then freely available FEE income on Card accounts. Of course that is just an aside and not a reflection on their overall strategy as they were in a very difficult market in the world’s most indebted Card consumers. They were just selling the ultimate dream as their highly effective ad campaigns at the time also suggested.
However, that does show that Cap One has already tried being aggressive in the market and lost, and this is much a first cut , two out of 3 shots analysis of their bid. Likely as details unfold they would be much under pressure in the stock markets and the bid pay out period, even on paper a likely extended time table right next to Bernanke’s Stimulus correction programs
They better tie up some good cash lines
And the last rider right now for Cap One watchers would be that if they indeed do not line up PE cash for this bid they are probably going to be head over heels in financing trouble in a couple of years esp with the CARD act limitations on yield per account. There is a very good reason Little Stuart is leaving this ship..