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In Capital One’s Acquisition Offer Breakup Fee of $1.38 billion if Discover Opts for Other Buyer

However, if regulators block the deal, there’s no breakup fee. Although Discover cannot actively seek other offers, it can consider proposals from other well-funded bidders.

According to sources familiar with the matter, Capital One’s significant acquisition proposal for Discover Financial includes a breakup fee of $1.38 billion if Discover opts for another buyer, but no such fee if U.S. regulators veto the deal. Capital One announced late Monday that it had reached an agreement to acquire Discover in an all-stock transaction valued at $35.3 billion. Although Discover cannot actively seek alternative offers, it can consider proposals from other well-funded bidders before shareholders vote on the transaction. If Discover chooses another offer, it would owe Capital One $1.38 billion, a common breakup fee range in bank deals, typically between 3% and 4% of the transaction value. Breakup fees serve to incentivize both parties to close the deal, often resulting in significant payouts if deals fall through, such as the estimated $6 billion payout from AT&T to T-Mobile after abandoning its 2011 takeover due to opposition from the U.S. Department of Justice.

Observers closely monitoring the Capital One agreement are particularly interested in whether U.S. banking regulators will approve it. Recent years have seen regulators block deals across various industries on antitrust grounds, and completing a transaction during an election year in an environment perceived as hostile to bank mergers is seen as uncertain. In the event that regulators reject the acquisition, neither party will owe the other a breakup fee, which is common in bank deals. However, last year, Canadian lender TD Bank agreed to pay $225 million to First Horizon after their takeover was halted due to regulatory scrutiny of the larger entity. During a conference call on Tuesday addressing the “intense regulatory backdrop” for this deal, Capital One CEO Richard Fairbank expressed confidence in obtaining approval and noted that the companies have kept regulators informed. To proceed with the acquisition, Capital One must obtain approvals from the Federal Reserve and the Office of the Comptroller of the Currency. Additionally, the Justice Department has the authority to comment on the acquisition and can litigate to block the transaction.

The deal materialized after Capital One initiated contact with Discover and did not involve an extensive search for all potential bidders, as reported by one source.