Capital One Discover acquisition has $1.4 billion breakup fee for another buyer

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Capital One Discover acquisition has $1.4 billion breakup fee for another buyer

Capital One headquarters in McLean, Virginia on February 20, 2024

Brendan Smialowski | AFP | Getty Images

Capital oneBlockbuster takeover proposal for Discover finance includes a $1.38 billion breakup fee if Discover chooses another buyer, but no such fee if U.S. regulators reject the deal, people with knowledge of the matter told CNBC.

Capital One said late Monday that it had reached an agreement to buy rival credit card provider Discover in an all-stock transaction valued at $35.3 billion.

While Discover cannot actively solicit alternative offers, it can consider proposals from other solvent bidders before shareholders vote on the transaction.

In the unlikely event that Discover chooses another offer, the company would owe Capital One $1.38 billion, the typical bank breakup fee of between 3% and 4% of the transaction value, the people said.

Separation fees are an industry practice designed to motivate both sides of an acquisition to complete the transaction. They can lead to massive payouts when deals fail, such as the estimated $6 billion AT&T paid T-Mobile after it abandoned its takeover efforts in 2011 due to opposition from the U.S. Justice Department.

Observers of the Capital One agreement are particularly interested in whether US banking regulators will allow it. Regulators have blocked transactions across industries in recent years on antitrust grounds, and conducting a transaction during an election year in an environment considered hostile to bank mergers has been described as unsafe.

Neither side will owe the other a breakup fee if regulators block the takeover, which is said to be typical of banking deals. Still, Canadian lender TD Bank agreed to pay $225 million to First Horizon last year after the takeover fell through amid regulatory scrutiny of the larger company.

Asked about the “intense regulatory background” for this deal during a conference call Tuesday, Capital One CEO Richard Fairbank said he believes it is “well positioned for approval” and that the companies have kept their regulators informed.

For the deal to go through, Capital One must obtain approvals 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 can initiate litigation to block the deal.

The deal came about after Capital One approached Discover and did not involve a comprehensive search of all possible bidders, according to one of the people.

—CNBC's Alex Sherman contributed reporting