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Thursday, 16 June 2011

ING sells ING Direct USA to Capital One for $9 bln. What happened with the $8.9 bln in cash of ING Direct?

RTL-Z, the Dutch economic tv-station, reports the following on the intended sale of ING Direct USA to Capital One (link in Dutch):

ING Group has decided to sell its American internet savings & loans bank ING Direct USA to Capital One Financial Corp, according to persons that are familiar with the situation on Thursday.
The agreement, which has a value of $9 bln, will be announced in short notice. Capital One will pay $6.2 bln in cash and $2.8 bln in stock for ING Direct USA. Herewith ING Group obtains a share in the American bank of 10%, according to someone familiar with the case.

According to this person, Capital One will bring up $2 bln in new capital for closure of the deal. ING refused to comment at this message.
The Dutch bank is forced by the European Commission to sell ING Direct USA, as this was a condition for approval of the state support that the bank received during the financial crisis. The forced sale is part of a larger reorganization, almost putting the bank’s balance sheet in half, due to the sale of the insurance branch Nationale Nederlanden and of other smaller parts of the bank.
The sale of ING Direct USA is hardly surprising, as I wrote an article about it two months ago: ING is now supporting forced sale of ING Direct

What is puzzling me, however, is the price that Capital One paid for the American branch of ING Direct. Here is a pertinent snip of the article of April 5th: 
At this moment  ING  is very busy with the sale. The first rumors spoke of expected proceeds of $10 bln, but according to the calculation of J.P. Morgan Cazenove this is very little, as the buyer receives already $8.9 bln in cash . These analysts think of $12-13 bln in their report. With the paper profit, in the best case-scenario, the whole remainder of Dutch state support can be paid back.
To quote the famous football (soccer) trainer Louis van Gaal: `Am I so smart, or are they so stupid´?!

If the cash is still present in ING Direct USA, it means that Capital One gets $8.9 bln in cash, in exchange for $6.2 bln in cash and $2.8 bln in Capital One stock. That must be the deal of the century: obtaining this bank for a lousy $100mln in CapOne stock!

It smells like ‘there is something rotten in the state of Denmark’ (Hamlet, by Shakespeare) and I hope that my readers will help me to find out what is so rotten about ING Direct USA.

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1 comment:

  1. Hey Ernst,

    In valuing ING Direct USA the income generating power of the company is the driver. If ING Direct is highly profitable, the company is worth a lot. If it loses money, it has little value.

    The amount of cash on the balance sheet is not important in the valuation. Most of the cash is probably offset by liabilities any way. And the cash is needed as a liquidity buffer when customers withdraw buffers.

    So yeah that cash looks attractive but does not really help the company. As a matter of fact, cash is not profitable for a bank. The more cash it has on its balance sheet the lower its profitability.

    I hope that helps.