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December 18, 2007

Credit crunch forces Capital One to abandon NetSpend acquisiton

Capital One announced expected credit losses of between $4.9 billion and $5.5 billion in 2008 (see CI 391), which senior cards analysts said played a large part in the termination of the deal.But the US-based credit card and banking business, which signed a letter of intent with NetSpend to expand their existing relationship, insisted the agreement was wider-ranging than the one they had before A Capital One spokeswoman told CI the business was looking to start selling its products through a wider range of distribution channels.She said: Through the partnership, we will develop and market Capital One prepaid cards through direct mail offers and eventually through retail locations and cheque cashing stores.Instead of the acquisition, Capital One will now acquire a minority interest in NetSpend, and it is expected a Capital One representative will join the NetSpend board of directors.The spokeswoman added: While we have agreed to terminate the planned acquisition, we remain committed to our relationship with NetSpend and we are confident in the viability and strength of our expanded partnership

By Verdict Staff

Capital One is determined to pursue its interest in the prepaid cards market, despite the collapse of its $700 million acquisition of prepaid marketer NetSpend. Capital One announced expected credit losses of between $4.9 billion and $5.5 billion in 2008 (see CI 391), which senior cards analysts said played a large part in the termination of the deal.

But the US-based credit card and banking business, which signed a letter of intent with NetSpend to expand their existing relationship, insisted the agreement was wider-ranging than the one they had before. A Capital One spokeswoman told CI the business was looking to start selling its products through a wider range of distribution channels.

She said: “Through the partnership, we will develop and market Capital One prepaid cards through direct mail offers and eventually through retail locations and cheque cashing stores.”

Instead of the acquisition, Capital One will now acquire a minority interest in NetSpend, and it is expected a Capital One representative will join the NetSpend board of directors.

The spokeswoman added: “While we have agreed to terminate the planned acquisition, we remain committed to our relationship with NetSpend and we are confident in the viability and strength of our expanded partnership. We do not foresee any change to our long-term strategy of deeply penetrating the prepaid market. Both companies are fully supportive of this strategy and are looking forward to the more tightly integrated approach to our existing partnership efforts.”

Despite significant expected write-downs for 2008, announced last month, Capital One remains optimistic about its fundamentals. But, as the company focuses on card issuance to lower-income groups, and with the difficult financial environment, it has to remain vigilant. The move to cancel the acquisition of NetSpend is being seen as part of that.

Francesco Burelli, cards and payment analyst at consultancy AT Kearney, told CI: “I think that this deal is one of the many casualties of the credit crunch and of the deteriorating outlook for the lending industries in US and over Europe. While it makes a lot of sense for the two organisations to test the synergies between the two product lines and portfolios, Capital One has taken a conservative approach on a deal that would have had a significant impact on its card and debt position.”

There is still the possibility Capital One could increase its stake in NetSpend, and eventually acquire the company when conditions improve and uncertainty has been removed from the credit markets. Prepaid is an obvious area for Capital One to move into, given its focus on the lower end of the credit market. NetSpend is a provider of prepaid card products that serve customers who are too young to be issued with credit or debit cards, or those who are not able to because of credit problems.

Burelli said: “The acquisition of a minority stake along with the right to buy additional shares in the company is a clear indication that Capital One is not ruling out the acquisition of NetSpend at a later date. I guess that the future development of an acquisition will be driven by the actual success of the commercial relationship with NetSpend and of the future development of the credit crunch.”

Sign of weakness

Capital One’s decision to cancel its acquisition shows just how deeply the subprime crisis is cutting into business strategy, even at the highest level. But while the deal’s termination has largely been seen as a sign of weakness in Capital One, it is possible the cash saved could be used to finance a share buy-back scheme.

Burelli added: “Lenders are trying to clean up their books, containing losses while minimising the negative impact that write-offs are having on their stock price and funding capabilities. The expected prolonged tough conditions for the industry are forcing caution even in those companies like Capital One that were used to the role of industry pioneer and innovator. This is particularly the case with this lender as its books rely on a majority of revolvers in segments that are vulnerable to the squeeze in the provision of credit and to fluctuations of interest rates.”

NetSpend CEO Rick Savard said the partnership with Capital One provided an opportunity to extend their visibility in the prepaid market. He said: “We believe that Capital One’s investment in NetSpend and their participation on our board will further drive alignment of our long-term objectives across the prepaid market. By leveraging each company’s strengths, we can continue to deliver innovative products, drive sales and help build even greater loyalty for our merchant partners.”

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