Capital One May Be Able To Acquire Cabela’s Card Portfolio After All

by Trefis Team
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Capital One (NYSE:COF) is likely to complete the acquisition of outdoor retail giant Cabela’s credit card portfolio without running into any regulatory issues this time around thanks to the involvement of Synovus Financial in the deal. [1] Capital One announced its intention to acquire Cabela’s financial services arm last October, but the plan was called off earlier this year due to opposition from financial regulators. [2] However, fresh talks between Cabela and Synovus have revived the possibility of Capital One finally bagging the $5.5-billion card portfolio, as Synovus will first acquire the financial services arm and then sell the card portfolio to Capital One, while retaining the ~$1 billion in deposits. As Synovus is a small bank with about $30 billion in assets (in comparison to Capital One which has an asset base exceeding $350 billion) the Cabela-Synovus deal should go through without any major regulatory interference – paving the way for a quick transfer of the card portfolio to Capital One later this year. [3]

As we have pointed out on several occasions in the past, a key strength that Capital One has demonstrated over the years is its willingness to grow inorganically through strategic acquisitions, and its ability to effectively integrate the acquired business units. We believe that the addition of Cabela’s card portfolio will have a positive impact on our $92 price estimate for Capital One’s stock. The price target is about 10% ahead of the current market price.

See our full analysis for Capital One

Last October, Capital One detailed its plan to acquire Cabela’s banking arm, World’s Foremost Bank (WFB), in a deal that was expected to run concurrently with Bass Pro Shops’ acquisition of Cabela. [2] As banks are only allowed to be acquired by other banks under regulatory norms, the Cabela-Bass Pro Shops merger was directly linked to the acquisition of WFB by Capital One. However, Capital One has been under scrutiny by regulators over deficiencies in its anti-money-laundering program since 2015, and when additional investigations into these deficiencies by regulators were raised earlier this year, a possible bank acquisition by Capital One became a remote possibility. As regulators seemed likely to reject the deal, Capital One pulled out of the agreement and WFB went up for sale again.

But with Synovus stepping in recently, the talks between Cabela, Synovus and Capital One will likely result in a solution that works well for everyone involved. Under the plan now being debated, Synovus will acquire WFB (which has less than $6 billion in total assets) in what should be a straightforward bank merger with little regulatory involvement. Synovus will then sell off the newly acquired portfolio of card loans to Capital One while retaining WFB’s deposit base of more than $1 billion.

Cabela reported $5.5 billion in outstanding card loans for its banking arm at the end of 2016. [4] So a deal with Capital One will result in the latter’s domestic card portfolio increasing from $97 billion at the end of 2016 to almost $103 billion on a pro forma basis. Additionally, Cabela also reported purchase volumes of $21.3 billion for its credit cards over full year 2016, which would add to Capital One’s domestic card purchase volume of $280.6 billion for 2016. More importantly, the new card portfolio will have a positive impact on Capital One’s charge-off rate, as Cabela’s cards witnessed a strong charge-off rate figure of 2.35% for 2016 – much better than the 4.16% domestic card charge-off rate for Capital One for the period. This, in turn, should help Capital One reduce its overall loan provisions at a slower rate going forward. You can see how a reduction in card loan provisions would impact our price estimate for Capital One’s stock by modifying the chart below.

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Notes:
  1. Synovus Financial in Talks to Buy Cabela’s Financial Arm, The Wall Street Journal, Mar 29 2017 []
  2. Capital One to be exclusive long-term card issuing partner with Leading Outdoor Retailer Cabela’s, Capital One Press Releases, Oct 3 2016 [] []
  3. Relbanks.com []
  4. Cabela’s Inc. Announces Fourth Quarter and Full Year 2016 Results, Cabela Press Releases, Feb 16 2017 []
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