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Capital One to buy North Fork for $14.6 billion

Capital One Financial Corp., one of the nation's largest credit card issuers, said Monday it has agreed to buy North Fork Bancorp Inc. in a stock and cash deal worth about $14.6 billion.
/ Source: The Associated Press

In its second major banking deal, credit-card issuer Capital One Financial Corp. is buying North Fork Bancorp. Inc. in a stock and cash transaction valued at nearly $15 billion.

The combined company will have deposits of more than $84 billion, putting it among the nation’s top 10 banks by deposits, according to Monday’s announcement.

While most analysts were positive about the acquisition, several expressed concern that it will complicate integration efforts at Capital One, which still is grappling with its purchase last year of Hibernia Corp., a New Orleans-based bank that was hard-hit by Hurricane Katrina shortly before the takeover.

“It’s positive to have more scale, more diversity in funding and business lines,” analyst Kathleen Shanley of Gimme Credit said of Capital One’s purchase. “But with any acquisition there are challenges of integration, and with Katrina there are special challenges that are ongoing.”

Capital One, based in McLean, Va., is one of the nation’s largest credit card issuers and one of the few remaining stand-alone card companies.

The addition of North Fork, a well-respected regional bank based in the Long Island town of Melville, will give Capital One additional retail outlets, including some 355 branches in New York, New Jersey and Connecticut.

Last year, it paid about $5 billion for Hibernia Corp., which operates some 300 branches under the name Hibernia National Bank in Louisiana and Texas. Capital One had reduced its offering price for Hibernia and delayed the sale’s closing to mid-November because of the difficulty assessing the damage to Hibernia’s portfolio, which has millions of dollars in outstanding loans to individuals and businesses hurt by Katrina.

The latest offer values North Fork at $31.18 per share, a nearly 23 percent premium to its closing price Friday.

Capital One shares fell $6.82, or 7.6 percent, to close at $83.10 on the New York Stock Exchange. Shares in North Fork rose $3.80, or 15 percent, to $29.20, also on the Big Board.

The Capital One-North Fork deal comes amid consolidation in the credit card industry. In the past year, a number of independent card issuers — including Providian Financial Corp., Metris Cos. and MBNA Corp. — have been acquired by major banks. The advantage is that retail deposit gathering is a good source of low-cost funding for debt operations, including card issuance.

Capital One has moved in the opposite direction, retaining its independence and acquiring banks.

“This transformational transaction results in a much more diversified financial services institution, both in terms of assets and funding,” said John Bartko, a credit analyst with the Standard & Poor’s rating agency in New York.

Still, he warned, “the North Fork acquisition introduces new integration risks,” which Bartko said would be lessened by Capital One’s decision to retain the management team at North Fork.

John A. Kanas, North Fork’s chairman, president and chief executive, will remain with the merged company as president of Capital One’s banking business and will join Capital One’s board, the announcement said.

Herb Boydstun, president of Capital One’s existing banking subsidiary, will continue to lead Capital One’s banking business in Louisiana and Texas, the announcement said. Boydstun formerly was CEO of Hibernia.

John McCune, director of banking research with SNL Financial, a research firm based in Charlottesville, Va., said that Capital One was evolving into a “more bank-like” company. He added, however, that it “remains unclear how they are going to brand this, and what’s their overall plan here.”

New York-based Fitch Ratings service on Monday upgraded Capital One’s debt to BBB+ from BBB. Standard & Poor’s and Moody’s Investors Service both put the ratings of Capital One on their watch lists for upgrades.

Meanwhile, the nonprofit consumer advocacy group Inner City Press-Fair Finance Watch said it would urge state and federal regulators to reject the deal on grounds that Capital One charges a disproportionately large number of its black and Hispanic customers higher rates on mortgage loans. It also said that North Fork was a lender to check cashers and other “fringe financiers,” who make high-interest loans in poor neighborhoods.

“Capital One is a questionable subprime lender,” said Matthew Lee, the group’s executive director. “Allowing it to take over a retail presence in New York would not be good for communities here.”

Capital One said the combined institutions would have a managed loan portfolio of more than $143 billion, more than 50 million customer accounts and some 655 retail branches.

“North Fork is a great strategic fit with Capital One and brings balance and diversification to our company,” Richard D. Fairbank, chairman and chief executive of Capital One, said in a statement. “North Fork provides us with a proven franchise and a strong growth platform in the largest banking market in America.”

The deal, which has been approved by both companies’ boards, still must be ratified by shareholders and pass regulatory muster.

North Fork shareholders will receive cash or stock equal to $11.25 plus the value at closing of 0.2216 Capital One shares.

The total transaction value of roughly $14.6 billion includes $5.2 billion in cash, which will be financed through a combination of internal resources and market financing.

The transaction is expected to close in the fourth quarter of 2006. Capital One expects the deal to achieve pretax cost savings of $275 million and boost its earnings beginning in 2008.

In announcing the deal, Capital One affirmed its earnings-per-share guidance for 2006 of between $7.40 and $7.80 per share, excluding the impact of this transaction.