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March 28, 2007

Morgan Stanley confirms spin-off of card unit Discover

In a filing with the US Securities and Exchange Commission (SEC) on 23 March, Morgan Stanley stated that it would distribute shares in Discover, the fourth-largest debit and credit card network in the US, to Morgan Stanley shareholders. Morgan Stanley first announced its intentions to spin off Discover in December 2006, although the SEC filing did not detail how many shares would be offered or how much would be raised from the IPO

By Verdict Staff

US financial services giant Morgan Stanley has confirmed long-expected plans to spin off its Discover card unit in an initial public offering (IPO). In a filing with the US Securities and Exchange Commission (SEC) on 23 March, Morgan Stanley stated that it would distribute shares in Discover, the fourth-largest debit and credit card network in the US, to Morgan Stanley shareholders.

Morgan Stanley first announced its intentions to spin off Discover in December 2006, although the SEC filing did not detail how many shares would be offered or how much would be raised from the IPO. It is expected that the spin-off will take place in the third quarter of 2007. Discover, which has 50 million cardholders in the US, earned $1.5 billion in 2006 on record revenue of $4.3 billion, and receivables amounted to $45.7 billion. Discover’s spin-off follows the announcement of Visa’s plans to go public in 2007, after MasterCard became a publicly traded company in 2006. Discover is expected to be listed on the New York Stock Exchange under the symbol DFS.

The future of Discover has been the subject of much speculation, following increasing shareholder pressure on Morgan Stanley to dispense with the unit in order to focus on its core investment banking, brokerage and trading operations.

Strong and stable

In announcing its fourth-quarter results in December, Morgan Stanley said that, following a strategic review, it had made the decision to separate Discover from Morgan Stanley, concluding both entities could best execute their respective growth strategies as stand-alone companies with independent boards of directors. Morgan Stanley said Discover was well positioned to be a strong, stable stand-alone company, and it had improved its business fundamentals in the last year.

In early 2007, Discover announced a new version of its cards, called Motiva, which it claims is the first credit card to give consumers cash rewards for good credit management. During 2006, the company also launched Discover Debit, a new signature debit card programme.

Discover’s latest financial results were posted on 21 March, just before the spin-off announcement. First-quarter pre-tax income was $372 million on a managed basis, a decline of 22 percent compared with $479 million in the year-ago period. Net revenues of $1.02 billion were 6 percent lower than a year ago.

However, transaction volume increased 13 percent from a year ago to a record $30.3 billion, primarily driven by higher sales volume resulting from increased cardmember usage and the acquisition of the Goldfish credit card business in the UK. Managed credit card loans of $50.7 billion were up 6 percent from a year ago and up 1 percent from the end of last year. Managed merchant, cardmember and other fees were $552 million, up 6 percent from a year ago.

The increase was primarily due to higher merchant discount revenues driven by higher sales activity and higher cardmember related fee revenue, partly offset by higher cardmember rewards.

The provision for consumer loan losses on a managed basis was $482 million, down 5 percent from last year, reflecting strong credit quality in the US portfolio – however, this was partially offset by increased credit losses in the UK.

Discover: Financial results

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