Still For Sale: One Storm-Damaged Bank

Capital One's takeover of New Orleans' Hibernia, though delayed, will help the buyer

At the very least, Capital One Financial Corp.'s (COF ) planned $5 billion purchase of New Orleans-based Hibernia Corp. (HIB ) looks like a serious case of bad timing. Scheduled to close Sept. 1, three days after Katrina hit, the deal is now delayed for a few months so shareholders can vote on a new price -- a sharp 9% cut in the pre-hurricane tab.

Even with the discount, some analysts wonder whether it still makes sense for McLean (Va.)-based Capital One. Sixty of Hibernia's 321 branches have been shut since the storm, and there's no telling when they'll reopen. Meanwhile, the bank is allowing customers to delay payments on consumer and small-business loans of up to $1 million until January -- a big hit to revenues and profits. Then there's the huge cost to rebuild. "Capital One is taking on a much larger merger-integration challenge than it originally anticipated," says Kathleen Shanley, senior analyst at Gimme Credit Finance.

Capital One may have little choice. For nearly a year, it has tried to diversify beyond its lucrative credit-card business by buying a bank. To renege might hurt its chances at future deals. "It would look bad as a national brand to just terminate the merger," says Linda Varoli, senior analyst with independent researcher Merger Insight in New York. The $220 million fee for walking away would also be painful. "There's a lot we can do together," Hibernia CEO Herb Boydston told BusinessWeek.

More important, there are good, strategic reasons for the deal. A bank will bolster Capital One's credit-card distribution. It also gains $11.85 billion in deposits, which should lower its cost of funding.

Later, Hibernia should benefit from demand for loans to rebuild homes and businesses. Still, the bank's most valuable asset may be its potential: Hibernia has been expanding into the hot Texas market, where thousands of Louisianans have fled and many are expected to stay.

By Mara Der Hovanesian and Nanette Byrnes in New York

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