Capital One headquarters in McLean, Virginia on February 20, 2024.
Brendan Smialowski | AFP | Getty Images
Capital One‘s blockbuster takeover proposal for Discover Financial features a $1.38 billion breakup fee if Discover decides to go along with another buyer, but no such fee if U.S. regulators kill the deal, individuals with knowledge of the matter told CNBC.
Capital One said late Monday it had an agreement to buy rival bank card player Discover in an all-stock transaction valued at $35.3 billion.
While Discover cannot actively solicit alternative offers, it may entertain proposals from other deep-pocketed bidders before shareholders vote on the transaction.
Within the unlikely event that Discover decides to go along with another offer, it might owe Capital One $1.38 billion, which aligns with the everyday breakup fee in bank deals of between 3% and 4% of the transaction’s value, said the people, who declined to be identified speaking in regards to the deal.
Breakup fees are an industry practice designed to motivate each side of an acquisition to shut the transaction. They can lead to massive payouts when deals sour, just like the estimated $6 billion AT&T paid to T-Mobile after giving up its 2011 takeover effort due to opposition from the U.S. Department of Justice.
Watchers of the Capital One agreement are taking particular interest in whether U.S. banking regulators will allow it to occur. Regulators have blocked deals across industries in recent times on antitrust grounds, and getting a transaction done during an election yr in an environment considered hostile to bank mergers has been called uncertain.
Neither side will owe the opposite a breakup fee if regulators block the acquisition, which is claimed to be typical for bank deals. Still, last yr Canadian lender TD Bank agreed to pay $225 million to First Horizon after its takeover collapsed amid regulatory scrutiny of the larger firm.
When asked in regards to the “intense regulatory backdrop” for this deal during a conference call Tuesday, Capital One CEO Richard Fairbank said he believed that he was “well-positioned for approval” and that the businesses have kept their regulators informed.
Capital One must get approvals from the Federal Reserve and the Office of the Comptroller of the Currency for the deal to undergo. The Justice Department also has the correct to comment on the acquisition, and might litigate to dam the transaction.
The deal happened after Capital One approached Discover, and didn’t include a large search for all possible bidders, in response to certainly one of the people.
— CNBC’s Alex Sherman contributed reporting.
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