Here are some of the details:
From Discover Press Release:
"Discover Financial Services (NYSE:DFS) today announced that it has reached an agreement to acquire The Student Loan Corporation (“SLC”) for $600 million, or $30 per share. Separately and immediately prior to the closing of Discover’s transaction, SLC will sell $28 billion of assets to Sallie Mae and $9 billion of assets to Citibank. Discover will acquire $4.2 billion of private student loans and related assets at an 8.5% discount, along with $3.4 billion of SLC’s existing asset-backed securitization debt funding. The amount to be paid by Discover for the private student loan assets is subject to a post-closing purchase price adjustment between Discover and Citibank, which owns 80% of SLC’s outstanding common stock.
“The private student loan business is an important part of Discover’s direct banking strategy, and this acquisition will enhance our competitive position in private student loan originations,” said David Nelms, chairman and chief executive officer of Discover. “The transaction is expected to be immediately profitable for our shareholders.”
Nelms added, “The acquisition gives us a team with expertise in all functional areas of student loans and an outstanding network of relationships with colleges and universities that complements our own.” SLC has 52 years of experience in serving schools, students and families nationwide. The company is a top-three originator of private student loans and owns studentloan.com, an industry-leading website. The transaction is expected to close by the end of calendar year 2010 and does not require approval by Discover’s shareholders."
The press release also highlighted these two points:
- Transaction expected to provide earnings accretion of approximately $.09 per share in 2011
- Acquisition expands Discover’s market presence and origination capabilities in private student loans
In the 2009-10 academic year just completed, Student Loan Corporation (subsidiary of Citibank's) saw their private loan originations plummet 52% to $884 million, dropping them to third place behind Sallie Mae (whose originations dropped by 47.9% to $2.3 billion) and Wells Fargo (who noted an increase of 10% in their private loan originations in one recent quarterly report). SLA estimates Discover's originations at $500-$600 for the 2009-10 academic year, so this acquisition likely will vault the Discover/Citi combination past Chase assuming that they can leverage the Citi sales and marketing platform to boost their originations (which is not a given). For SLA's January 2010 market share estimates click here (look for an update to these figures in late October).
One other interesting question not answered by the announcement today is Discover's strategy for servicing private student loans. Based on a quick search on SimpleTuition, Discover noted that their private loans are currently being serviced by Great Lakes. With Disvover now having the potential of more than $8.0 billion in private student loans after the deal closes (buying $4.2 billion from Citi + additional $3.4 billion of Citi private loan ABS and $0.8 billion in private loans on the Discover balance sheet currently), Discover certainly has the critical mass to go it alone on the servicing front and perhaps leverage their credit card servicing operations (just as Citi has their student loan servicing operations alongside their servicing for their other products).
Here is a media round-up:
From Dow Jones Newswire:
"It's not often that you can do an acquisition that is such a great fit and is immediately accretive to shareholders," said David Nelms, Discover's chief executive, in an interview with Dow Jones Newswires. Under the terms of the deal, Discover will pay $30 a share for the company, acquiring $4.2 billion of private student loans at 91.5 cents on the dollar. The purchase "significantly accelerates our participation in the private loan business," said Nelms. "It gives us a platform that's very strong and gives us a more mature business." The deal is slated to close by year end.
"Private loan demand is growing and contrary to some perceptions out there, done right it actually has very low loan losses and risks compared to other unsecured loans,” Nelms, 49, said today in an interview...Discover may rank as the third-largest private educational lender when the deal is completed, he said. “We do expect over time these students and their parents will appreciate the great value we’re providing in student loans and we hope to certainly attract some of them to credit cards,” said Nelms, whose company is based in Riverwoods, Illinois. Cross-selling “is not the primary reason for this acquisition,” he said. “The business itself can have very attractive risk-return characteristics."
The Financial Times noted that Citi would be taking a $500 million after-tax loss with the transaction:
"Citigroup will incur a $500m after-tax loss this quarter as part of a deal to sell the bulk of its student loan business to Sallie Mae and Discover Financial Services."
From the Associated Press:
"The changes have hit Citi's student loan business and Sallie Mae harder than the industry as a whole, said Tim Ranzetta, founder of the independent research firm Student Lending Analytics. He estimates industrywide the number of new private loans was down 24 percent in the 2009-2010 academic year compared with the previous year, while Citi and Sallie Mae have seen their new loan business cut by roughly half.
"There is a reordering of the industry going on," Ranzetta said, noting that Discover Financial and Wells Fargo & Co. are gaining market share."
One analyst used terms of this deal to argue that Sallie Mae is undervalued; the market seemed to agree as SLM rose 4.6% today (from Barrons):
"In a note to clients this morning, FBR Capital analyst Matt Snowling writes that Sallie Mae’s (SLM) deal announced this morning to buy $28 billion of student loans from Citigroup (C) provides evidence SLM shares are dirt cheap.
Sallie’s purchasing the assets for $1.2 billion. If the $28 billion in loans is worth $1.2 billion, then Sallie’s $148 billion of existing FFELP student loans it holds should by the same math be worth $6 billion. In his view, that means Sallie’s actually trading below its portfolio at the current market cap of $5.5 billion, meaning most of the business is being had for free at the current price. “Essentially, this means the market is assigning $0 value to the company’s private loan portfolio, origination platform, servicing operations, and debt collection operations.”
Here was Fitch's take on the transaction which includes more details about the portfolio acquired by Discover:
"Additionally, Discover will acquire approximately $4.2 billion of private student loan assets from SLC through the acquisition of three private loan securitization trusts; SLC Private Student Loan Trust 2006-A, 2010-A, and 2010-B, at an 8.5% discount. Over 70% of the assets are covered by insurance and approximately 65% of the loans are in repayment. Discover will assume $3.4 billion of securitization debt associated with the trusts and will provide for additional funding of the assets at close, which will come from the company's ample liquidity portfolio."
One obvious question arising out of this transaction is why didn't Sallie Mae get Citi's private loan assets. All indications are that Discover got a good price since it will be immediately accretive (to the tune of $0.09) to 2011 earnings. A Sallie Mae/Citi combination would have had almost a 40% share of the market. Instead, with Discover owning Citi, the competition atop the industry has now gotten more crowded, with Wells Fargo also among the leaders. Let the competition begin...