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Capital One to buy HSBC's US credit card arm

Published: 14:53 10 Aug 2011 BST

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Capital One Financial Corp (NYSE:COF) said Wednesday it will buy London-based HSBC Holdings' (NYSE:HBC) US credit card business for a premium of roughly $2.6 billion.

"The acquisition of HSBC's domestic credit card business is an attractive strategic and financial opportunity in a business we know well," Richard Fairbank, Chief Executive of Capital One said.

"Adding the HSBC card business to our own will enhance our credit card franchise and accelerate our achievement of a leadership position in retail card partnerships.”

The deal includes $30 billion of HSBC’s credit card portfolio consisting of credit card loans, and private label retail partnership platforms. The portfolio will be acquired for an 8.75%premium to par value of all receivables, which at June 30, would have totaled $2.59 billion.

Despite the addition of $30 billion of HSBC credit card loans, the company does not expect a significant increase in total assets, it said in a statement.

McLean, Virginia-based Capital One plans to fund HSBC credit card loans with cash and proceeds from the balance sheet repositioning related to its pending ING Direct acquisition, it said.

In June, Capital one struck a deal to acquire ING's U.S. online-banking business for $9 billion in cash and stock. It raised $2 billion in equity to fund the acquisition.

The company said the HSBC transaction is expected to deliver an internal rate of return greater than 20%, with a return on invested capital greater than 25% in 2013.

While the transaction is expected to result in dilution its book value per share, the anticipated accretion to earnings will result in an earn-back period of four years, Capital One added.

Capital said it is planning a $1.25 billion capital raise, however, the amount and timing of this raise has not yet been decided, and is dependent on a number of factors, including the close of the ING and HSBC acquisitions.

Capital One expects to realize cost synergies of $350 million from the HSBC deal, and incur restructuring costs of about $420 million.

The deal is to wrap-up by the second-quarter of next year, and is expected to add to the company’s earnings by 2013. It anticipates its Tier-1 common ratio, a measure of financial strength, to be in the range of 9.5% at the end of the second quarter.

Capital One offers a broad spectrum of financial products and services to consumers, small businesses and commercial clients. It has roughly 1,000 branch locations mainly in New York, New Jersey, Texas, Louisiana, Maryland, Virginia, and the District of Columbia.

Capital One’s shares jumped 1.69% to 41.51 Wednesday in pre-market trade, while HSBC’s stock fell 3.34% to $43.42 in New York.

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