Capital One headquarters in McLean, Virginia on February 20, 2024.
Brendan Smelowski | AFP | Getty Images
Capital Oneblockbuster takeover bid Discover financial includes a breakup fee of $1.38 billion if Discover decides to go to another buyer, but no such fee if U.S. regulators kill the deal, people familiar with the matter told CNBC.
Capital One announced the news late Monday. there was an agreement acquire rival credit card player Discover in a $35.3 billion all-stock deal.
While Discover can’t actively solicit alternative offers, it can consider offers from other wealthy bidders before shareholders vote on the deal.
In the unlikely event that Discover decides to make another offer, it would owe Capital One $1.38 billion, which equates to a typical bank deal termination fee of 3% to 4% of the transaction value, the people who backed out said offers. be identified when talking about the transaction.
A termination fee is an industry practice designed to incentivize both parties to a transaction to close the deal. They can lead to huge payouts in case of unsuccessful trades, as it is estimated that AT&T paid T-Mobile $6 billion after abandoning a takeover attempt in 2011 due to opposition from the US Department of Justice.
Observers of the Capital One deal are particularly interested in whether U.S. banking regulators will allow it. Regulators have blocked deals in various industries on antitrust grounds in recent years, and conducting a transaction in an election year in an environment seen as hostile to bank mergers has been called questionable.
Neither party would be required to pay the other to break up if regulators block the acquisition, which is said to be typical in banking deals. However, last year the Canadian lender TD Bank agreed to pay First Horizon $225 million after its takeover collapsed amid regulatory scrutiny of the larger firm.
When asked about the “tight regulatory environment” for the deal during a conference call Tuesday, Capital One CEO Richard Fairbank said he believed it was “well positioned for approval” and that the companies were keeping their regulators in the loop.
For the deal to go through, Capital One must receive approval from the Federal Reserve and the Office of the Comptroller of the Currency. The Justice Department also has the right to comment on the acquisition and could sue to block the deal.
The deal came about after Capital One approached Discover and did not involve an extensive search of all possible bidders, one of the people said.
— CNBC’s Alex Sherman contributed reporting.
Don’t miss these stories from CNBC PRO: