Business > Katrina clouds Hibernia-Capital One deal

New Orleans-based Hibernia, which has some three-fourths of its loans and deposits in Louisiana, according to analysts, and Capital One late Wednesday delayed closing their merger by six days to September 7, citing Katrina's devastation and disruption.

Shares of merging companies usually move closely in tandem. But in early afternoon trading, Hibernia shares fell $1.93, or 6 percent, to $29.86, after earlier dropping to $29.63, while Capital One shares rose $1.42, or 1.8 percent, to $81.55. On Thursday, Capital One fell 2.6 percent and Hibernia rose .1 percent.

"This tells you there is very active arbitrage activity, and there is a camp of investors betting this deal doesn't go through or gets renegotiated significantly," said Kevin Fitzsimmons, associate director at Sandler O'Neill & Partners

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Hibernia was valued at $33 per share when it agreed on March 6 to be acquired by McLean, Virginia-based Capital One.

Capital One did not immediately return calls for comment. Calls to Hibernia were not answered.

Analysts said the sell-off in Hibernia was exacerbated by the horrifying images of flood and wind damage and their toll on victims, and the unwillingness of investors to hold onto their Hibernia shares over the three-day Labor Day weekend.

Hibernia, which has $22.1 billion of assets, commands about 30 percent of all deposits in New Orleans. The hurricane forced the closure of bank branches in the greater New Orleans, Bayou and South Central regions of Louisiana.

ADVERSE, BUT MATERIAL?

Analysts said Capital One and Hibernia needed to postpone the merger to review the storm's financial impact. Some customers may struggle to repay loans, or withdraw deposits if they move. And a "material adverse change" in Hibernia's business could prompt a renegotiation of the merger's terms.

"If Capital One did want to claim material adverse change, they could, so the question is, do they want to walk away?" said Peter Lobravico, head of merger arbitrage trading at Wall Street Access, a New York brokerage. "The main thing people are worried about is Hibernia's loan portfolio. Are they going to have defaulted loan payments?"

At the Chicago Board Options Exchange, some investors bought Hibernia put options, giving them the right to sell shares at $30 by mid-October. "People are just worried so they are buying protection," said David Seidman, the CBOE's designated market maker for Hibernia.

Fitzsimmons, whose firm rates both companies "buy," still expects the merger to close under its original terms, noting that the September 7 date is a delay of just three business days.

"If they really wanted to step away or renegotiate the terms, they would take more time," he said. "But people are watching what is happening in New Orleans and are horrified. Given that the situation is so fluid, investors don't want to be caught over the weekend holding Hibernia stock if something significant changes."

(Additional reporting by Doris Frankel in Chicago and Mark McSherry in New York)

2005-09-03