Capital One’s Takeover Proposal for Discover Financial Includes $1.38 Billion Breakup Fee: Sources
Capital One, a leading financial institution, has made a groundbreaking takeover proposal for Discover Financial, which includes a substantial $1.38 billion breakup fee if Discover decides to opt for another buyer. However, if U.S. regulators reject the deal, no such fee will be applicable. This information comes from sources familiar with the matter, as reported by CNBC.
Late on Monday, Capital One announced its agreement to acquire Discover in an all-stock transaction valued at an impressive $35.3 billion. While Discover is not actively seeking alternative offers, it is open to entertaining proposals from other potential buyers before shareholders vote on the transaction.
In the unlikely event that Discover chooses to accept another offer, it would be required to pay Capital One the substantial amount of $1.38 billion. This figure aligns with the typical breakup fee range of 3% to 4% of the total transaction value in bank deals, according to insiders.
Breakup fees are a common industry practice designed to incentivize both parties involved in an acquisition to proceed with the transaction. These fees can result in significant payouts when deals fall through, such as the estimated $6 billion that AT&T paid to T-Mobile after abandoning its takeover attempt in 2011 due to opposition from the U.S. Department of Justice.
Observers closely monitoring the Capital One-Discover agreement are particularly interested in whether U.S. banking regulators will approve the deal. In recent years, regulators have blocked various deals across industries on antitrust grounds. Moreover, completing a transaction during an election year, in an environment considered unfavorable to bank mergers, adds an additional layer of uncertainty.
If regulators do block the acquisition, neither party will owe a breakup fee to the other, which is typical in bank deals. However, it is worth noting that last year, Canadian lender TD Bank agreed to pay $225 million to First Horizon after their takeover collapsed due to 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. Fairbank expressed confidence in obtaining approval, stating that the companies have kept regulators informed throughout the process.
For the deal to proceed, Capital One needs approvals from the Federal Reserve and the Office of the Comptroller of the Currency. Additionally, the Justice Department has the authority to comment on the acquisition and can potentially litigate to block the transaction.
It is important to note that Capital One’s approach to Discover did not involve an extensive search for all possible bidders. Instead, the deal was initiated after Capital One directly approached Discover, as revealed by one of the sources.
The proposed takeover between Capital One and Discover Financial has garnered significant attention due to its potential impact on the banking industry. As the regulatory landscape remains uncertain, all eyes will be on whether this deal can successfully navigate the complex approval process and reshape the financial sector.