Bank Merger Could Be Storm Casualty

Some think Capital One will lower the price it pays for New Orleans-based Hibernia.
Author:
Publish date:

"Dream Big!" read an account promotion on the Web site of New Orleans-based

Hibernia

(HIB)

Friday.

Right now, the tens of thousands of New Orleans residents trying to escape the city are dreaming only of a drink of water, a warm meal and a safe place to sleep. For another 400,000 people who fled Louisiana's largest city, the last thing on their minds is opening a bank account.

Katrina's massive human toll is well-known. In a footnote, the storm is also creating a nightmare for stockholders of Hibernia, which had plans of partnering with

Capital One

(COF) - Get Report

, the Virginia-based credit card company.

Katrina's wrath forced Capital One to put off the completion of its $5.35 billion merger with Hibernia by a week. The deal, which was expected to close Sept. 1, now is set to be completed by Sept. 7. Officially, both banks are saying they expect the deal to go forward on the terms approved by shareholders, with Capital One paying roughly $33 a share for Hibernia.

But the current betting on Wall Street is that the deal likely won't get done by next Wednesday or at the agreed upon price. Traders noted that every merger agreement allows the buyer a so-called "out" clause, if a big, material change in events occurs at the company being acquired.

In the days since Katrina delivered a knockout blow to New Orleans, shares of Hibernia have been steadily sinking. The stock, which closed at $33.67 on Aug. 26, was down to as low as $30 a share on Sept. 2, an 11% plunge.

In the wake of Katrina, shares of Hibernia have lost nearly half of the 24% premium that Capital One was willing to pay for its shares back on March 7.

The reason for the sell-off is a cruel but brutal reality of how Wall Street often responds to a tragedy.

Traders suspect that there's no way Capital One can go ahead with the merger at the agreed upon price, given that almost three-quarters of the bank's branches are closed. With so many homes in greater New Orleans destroyed and flooded, it's not known when Hibernia's customers will be returning to the area.

"Hibernia is not worth today what it was three weeks ago," says Michael Stead, the manager for

River Aire Investment

, a hedge fund that mainly invests in financial stocks and owns shares of Capital One. "I do not expect

Capital One to walk away, but I would be appalled if it gets done without a renegotiation of the price. Capital One is still accountable to its shareholders."

Capital One has good reason to blanch at the original terms. The deal was predicated on Capital One's wish to broaden its reach by tapping into Hibernia's pool of customers, who have about $22 billion in assets. But with no one knowing where so many of Hibernia's customers will live and work for many months, Capital One will have a tough time tapping that market, at least in the immediate future.

"It changes the benefit that Capital One was going to receive from Hibernia," says David Hendler, an analyst with CreditSights. "If there was any loan strategy of selling Capital One credit cards in the Hibernia system, it's going to be delayed."

Not everyone thinks the deal is dead at its original price. While Katrina will likely have a negative immediate impact on Hibernia's profit margin, it could pay big dividends down the road as the bank is well-positioned to capitalize on the big rebuilding effort that will take place in the New Orleans area.

"There will be an economic disruption and an economic advantage to this,'' says Timothy Ghriskey, a money manager and chief investment officer of

Solaris Asset Management

in Bedford Hills, N.Y.

Ghriskey, whose fund owns shares of Capital One, says Solaris has been giving serious consideration to buying shares of Hibernia, especially as the price continues to drop. He says there's an opportunity to make a fast profit on Hibernia, if the deal goes forward at a price close to the original $33-a-share offer.

"Our gut is it is not going to get revised," Ghriskey says.

Maybe that's so. But clearly much of Wall Street thinks differently.