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Bank's Deal Is in the Cards

Washington Mutual agrees to buy Providian, which offers customers Visa and MasterCards.

June 07, 2005|E. Scott Reckard | Times Staff Writer

Washington Mutual Inc. agreed Monday to acquire credit card company Providian Financial Corp. for about $6.4 billion in stock and cash, a move that would give the Seattle-based thrift a potentially high-profit new business line.

San Francisco-based Providian offers Visa cards in its own name and in partnership with entities as PayPal Inc. and the Democratic Party, as well as MasterCards in partnership with EBay Inc.

Shares of both companies fell on the news, with Washington Mutual dropping $1.03 to $40.54 and Providian falling 33 cents to $17.63.

The chilly reaction in part reflects concern that the deal comes in the midst of a costly branch expansion by Washington Mutual, analysts said -- as well as potential problems for Providian's business if the economy slows.

Providian's customers have traditionally included many with past credit problems, who are often the first to be hurt by a downturn. Providian stumbled financially in 2001, a recession year, when regulators forced it to sell assets and shrink drastically after making too many loans to the so-called sub-prime market of borrowers with blemished credit.

The companies said that new management had eliminated that liability, and that Providian now was focused on customers with better credit scores. They said the Providian management team -- led by Chairman and Chief Executive Joseph W. Saunders -- has agreed to stay on and will continue to be based in San Francisco.

Washington Mutual's chairman and chief executive, Kerry Killinger, a veteran engineer of takeovers, said during a conference call with analysts that he had scouted acquisition candidates since the company launched its own credit card business from scratch last year.

"This puts us on the fast track" to expanding that business, he said, citing Providian's expertise in direct-mail marketing and technical management of card operations.

The companies said accounts and payment procedures wouldn't change for Providian customers. The acquisition was expected to close in the fourth quarter of this year, subject to the approval of Providian shareholders and regulators.

The terms of the deal called for Providian stockholders to get the equivalent of 0.45 share of Washington Mutual stock for each of their current shares, with 89% in stock and 11% in cash. That valued the deal at $18.71 a share of Providian stock as of Friday's close; the final value will be based on the average price of Washington Mutual stock in the 10 trading days before the transaction closes.

Washington Mutual is the nation's third-largest mortgage lender and the third-largest retail banking presence in California after Bank of America Corp. and Wells Fargo & Co. The deal would boost its loan portfolio to $232 billion from $214 billion, with credit card lending making up 8% of the total.

The idea would be to grow the business rapidly by offering Washington Mutual-branded credit cards to customers of the savings and loan. The company said its network of 1,968 banking branches and 341 mortgage offices, along with its 9.2 million debit cards, provided a platform to market credit cards as a complement to its deposit accounts, prime and sub-prime home loans, home equity lending and apartment loans.

"It would give us a certain amount of diversification and help smooth out the revenue streams over time," Killinger said in an interview. "It's a highly profitable business if it's done correctly, and we think the team at Providian has done a great job turning things around."

But analysts said logistics could pose a hurdle, noting that Washington Mutual has at times struggled to get its computer systems to mesh with those of the companies it has acquired. Those include three former Southern California thrifts -- American Savings, Great Western Bank and Home Savings.

In addition, they said, the company is already in the midst of a plan to add hundreds of new branches, an effort that requires a high level of funding.

Like its share price, Washington Mutual bond prices also slipped on the news.

"The consensus is that the consumer is pretty stretched right now, so even modest increases in interest rates might cause some credit quality problems," said Larry Meding, a corporate bond analyst at Morgan Keegan & Co., who maintained his "neutral" rating Monday on Washington Mutual bonds.

"The other concern is that WaMu has been pretty aggressive at growing its retail branch network," Meding said. "Entering the credit card business is very capital-intensive, and it could put some strain on them going forward as they try to handle both of these expansions."

Providian spokesman Alan Elias said that the average credit score for its clients was now 660, and that it no longer provided cards to anyone with a credit score under 600 -- the "dead square sub-prime market."

Killinger said he was confident his company easily generated enough cash to fund the credit cards and the branch expansion, adding that Washington Mutual will open 250 branches this year. He also praised Providian, the ninth-largest issuer of credit cards, for doing "an excellent job" of cleaning up its bad loans.

"It's a dramatically different company than it was three or four years ago," he said. "Most of the portfolio is right in the sweet spot for WaMu -- it's more what we call the broad middle market ... it matches our customer base well."

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