“Discover Financial Services (NYSE:DFS) today announced that it has reached an agreement to acquire The Student Loan Corporation (SLC) for $600 million, or $30 per share. Separately and immediately prior to the closing of Discover’s transaction, SLC will sell $28 billion of assets to Sallie Mae and $9 billion of assets to Citibank. Discover will acquire $4.2 billion of private student loans and related assets at an 8.5% discount, along with $3.4 billion of SLC’s existing asset-backed securitization debt funding. The amount to be paid by Discover for the private student loan assets is subject to a post-closing purchase price adjustment between Discover and Citibank, which owns 80% of SLC’s outstanding common stock.
Based on a quick search on SimpleTuition, Discover noted that their private loans are currently being serviced by Great Lakes
The private student loan business is an important part of Discover’s direct banking strategy, and this acquisition will enhance our competitive position in private student loan originations, said David Nelms, chairman and chief executive officer of Discover. The transaction is expected to be immediately profitable for our shareholders.
Nelms added, The acquisition gives us a team with expertise in all functional areas of student loans and an outstanding network of relationships with colleges and universities that complements our own. SLC has 52 years of experience in serving schools, students and families nationwide. The company is a top-three originator of private student loans and owns studentloan, an industry-leading website. The transaction is expected to close by the end of calendar year 2010 and does not require approval by Discover’s shareholders.”
- Transaction expected to provide earnings accretion of approximately $.09 per share in 2011
- Acquisition expands Discover’s market
presence and origination capabilities in private student loans
One other interesting question not answered by the announcement today is Discover’s strategy for servicing private student loans
In the 2009-10 academic year just completed, Student Loan Corporation (subsidiary of Citibank’s) saw their private loan originations plummet 52% to $884 million, dropping them to third place behind Sallie Mae (whose originations dropped by 47.9% to $2.3 billion) and Wells Fargo (who noted an increase of 10% in their private loan originations in one recent quarterly report). SLA estimates Discover’s originations at $500-$600 for the 2009-10 academic year, so this acquisition likely will vault the Discover/Citi combination past Chase assuming that they can leverage the Citi sales and marketing platform to boost their originations (which is not a given). For SLA’s market share estimates click here (look for an update to these figures in late October).
With Disvover now having the potential of more than $8.0 billion in private student loans after the deal closes (buying $4.2 billion from Citi + additional $3.4 billion of Citi private loan ABS and $0.8 billion in private loans on the Discover balance sheet currently), Discover certainly has the critical mass to go it alone on the servicing front and perhaps leverage their credit card servicing operations (just as Citi has their student loan servicing operations alongside their servicing for their other products).
“It’s not often that you can do an acquisition that is such a great fit and is immediately accretive to shareholders,” said David Nelms, Discover’s chief executive, in an interview with Dow Jones Newswires. Under the terms of the deal, Discover will pay $30 a share for the company, acquiring $4.2 billion of private student loans at 91.5 cents on the dollar. The purchase “significantly accelerates our participation in the private loan business,” said Nelms. “It gives us a platform that’s very strong and gives us a more mature business.” The deal is slated to close by year end.