Author Topic: HSBC (Household Bank) acquires Metris (DMB): A Marriage Made in H*ll!  (Read 6446 times)

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Well, another one was down on December 1, 2005, as Metris was acquired by HSBC, the parent corporation of Household Bank:

Press Release

Metris Stockholders Approve Acquisition By HSBC

MINNETONKA, Minn.--(BUSINESS WIRE)--Nov. 30, 2005--Metris Companies Inc. (NYSE:MXT) announced that, at a special meeting held today in Minneapolis, its stockholders voted to approve the acquisition of the Company by HSBC Finance Corporation. Of the stockholders who voted, more than 99 percent voted in favor of the acquisition. All of the Series C Perpetual Convertible Preferred Stock of Metris voted in favor of the acquisition. The acquisition is expected to close on December 1, 2005. Upon completion of the transaction, Metris will become a wholly owned subsidiary of HSBC Finance Corporation.

Metris and HSBC Finance Corporation entered into a definitive agreement on August 4, 2005, under which HSBC Finance agreed to acquire Metris in an all-cash transaction which valued Metris at $1.59 billion. Under the terms of the agreement, Metris common stockholders will be entitled to receive $15.00 for each share of Metris common stock.

Metris Companies Inc., based in Minnetonka, Minnesota, is one of the largest bankcard issuers in the United States. The company issues credit cards through Direct Merchants Credit Card Bank, N.A., a wholly owned subsidiary headquartered in Phoenix, Arizona.

HSBC Finance Corporation, headquartered in Prospect Heights, Illinois, through its subsidiaries and affiliates, is the sixth largest issuer of MasterCard and Visa cards in the nation. HSBC Finance is a subsidiary of HSBC North America Holdings Inc., one of the top 10 financial organizations in the United States with assets totaling more than $300 billion. Both companies are wholly owned subsidiaries of HSBC Holdings plc (HSBC) which is headquartered in London and is the holding company of HSBC Group, one of the largest banking and financial services organizations in the world, with well-established businesses in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa.<<snip>>

How nice of out the equally-scummy competition. 

But, didn't Metris have the SEC after them?  Yes, but, it seems that at the SEC, buyout money talks.  And, HSBC let them know there was plenty of that as far back as last summer:

HSBC Finance Corporation to Acquire Metris Companies Inc
PR Newswire,  August 4, 2005 

PROSPECT HEIGHTS, Ill. and MINNETONKA, Minn., Aug. 4 /PRNewswire/ -- HSBC Finance Corporation (HSBC Finance) and Metris Companies Inc. have entered into a definitive agreement for HSBC Finance to acquire Metris in an all-cash transaction which values Metris at US$1.594 billion. Upon completion, Metris will become a wholly-owned subsidiary of HSBC Finance.

HSBC Finance, headquartered in Prospect Heights, Illinois, through its subsidiaries and affiliates, is the sixth largest issuer of MasterCard and Visa cards in the nation. Metris, with headquarters in Minnetonka, Minnesota and offices in five states, is the 11th largest issuer of MasterCard and Visa cards in the United States with managed receivables of approximately US$5.9 billion. Metris primarily serves the near-prime credit card market through direct mail and partnership affiliations.

"HSBC Finance is a major provider of near-prime consumer finance credit in the United States and this acquisition deepens our capabilities to serve the full spectrum of credit card customers," said Bobby Mehta, Chairman and CEO of HSBC Finance Corporation. "We are very familiar with Metris and its management team and look forward to the integration of their business within HSBC."

Metris was formed in 1994 and became a public company in 1996. The company issues credit cards through Direct Merchants Credit Card Bank, N.A., a wholly-owned subsidiary headquartered in Phoenix, Arizona.

"Being part of a world-class organization such as HSBC is a logical step following our successful turnaround of the business," said David Wesselink, Chairman and CEO of Metris. "HSBC and Metris will make a terrific combination, continuing to serve the needs of our customers."

Under the terms of the merger agreement, Metris common stockholders will be entitled to receive US$15.00 for each share of Metris common stock for a transaction that closes on or before December 9, 2005. After December 9, 2005, the price per common share to the common stockholders will decrease by an amount based on the pay-in-kind dividends that accumulate on Metris' Series C Preferred Stock ("Preferred Stock"), in accordance with its terms. For illustrative purposes only, if the closing was on March 31, 2006 (the latest date on which closing could occur under the terms of the contract), the common stockholders would receive $14.82 per share. The transaction is currently anticipated to close in the fourth quarter of 2005.

The Board of Directors of Metris has unanimously approved the transaction, as has the Board of Directors for HSBC Finance.

As part of the total consideration, the Preferred Stock held by Thomas H. Lee Partners, L.P. will receive, in accordance with its terms, approximately $682.6 million if the transaction closes on or before December 9, 2005. Subsequent to December 9, 2005, the amount payable on the Preferred Stock will be increased based on the pay-in-kind dividends that accrue on the Preferred Stock in accordance with its terms. The holders have given an irrevocable proxy to HSBC Finance to vote in favor of the transaction. These shares represent approximately 44 percent of the voting rights of Metris stockholders. Total consideration payable to common stockholders, on or before December 9, 2005, is approximately $911.1 million.

The acquisition is subject to certain conditions including resolution of the potential civil enforcement action of the Securities and Exchange Commission against Metris as described in Metris' Form 8-K dated July 12, 2005, approval by the stockholders of Metris and various regulatory consents.

HSBC Finance is a subsidiary of HSBC North America Holdings Inc., one of the top 10 financial organizations in the United States with assets totaling more than US$300 billion. Both companies are wholly-owned subsidiaries of HSBC Holdings plc (HSBC) which is headquartered in London and is the holding company of the HSBC Group, one of the largest banking and financial services organizations in the world, with well established businesses in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. As of June 30, 2005, the HSBC Group had total assets of US$1,467 billion. HSBC is listed on the London, New York, Hong Kong, Paris and Bermuda stock exchanges.

Goldman, Sachs & Co. acted as the lead financial advisor to Metris. UBS Securities LLC was also a financial advisor to Metris. HSBC Securities (USA) Inc. acted as financial advisor to HSBC Finance.<<snip>>

The situation with the SEC was, As I said, resolved.

Now, what's next?  Well, for Metris employees, it should be a familiarity with the unemployment line for all too many of them:

What’s Next For Metris Employees?
Posted in 05 Regulators, 05 All Articles, 05 HSBC Metris at 3:29 pm

Chief Operating Officer Alan Jebson said HSBC would save about $20,000 for every job it moved to Asia. HSBC runs four service centers in India, three in China and one in Malaysia, one in the Philippines and one in Sri Lanka. Vietnam could be its next outpost, where there is a high population of English and French speakers. HSBC wants to trim jobs in the United States and England where the cost of living is higher. And it’s hard to take a $20,000 per year pay cut to stay employed unless you are the CEO.

As for Metris, which had their own problems with regulators, Household International (HSBC) doesn’t want skeletons jumping out of their own predatory lending closet. Information sharing will be a one-way street according to experts.

Oh, great!  >:(  1-800-INDIAREP.  And, as far as the skeletons in the closet?  We know all about those don't think we don't...

Indeed, the similarities are stunning.  Like identical:

Metris, Household International Similar for HSBC

Seen in Inner City Press regarding Metris:

“Metris’ lead financial advisor in the deal was Goldman, Sachs — which also sold Household International to HSBC. The similarities are not only subprime, but also SEC investigations. In July 2005, Metris received a Wells Letter from the Securities and Exchange Commission. Metris said the SEC was planning to recommend an enforcement action against Metris’ chairman and chief executive officer, David Wesselink, and its controller, Mark Wagener. Hey, as with Aldinger, maybe HSBC will put them on its board of directors.” (full link)

Indeed, the pertinent part of the article linked to in this blog article:

HSBC acquired the scandal-plagued subprime lender Household International in 2002-03, for $14 billion dollars. For the reasons set forth below, Inner City Press / Community on the Move and its Fair Finance Watch from November 18, 2002, onwards has opposed this combination.  Household entered a cease-and-desist order with the SEC on March 19, 2003; then, between March 25 and 28, various regulators delivered approvals (several of which, including those of the Delaware Insurance Department, the Maryland banking department and the OCC, were conditional, see below).  Following the "consummation" on March 28 (a court having been unable to hear the lawsuit ICP filed on March 27), ICP carried to campaign to HSBC's regulators in each continent, see, e.g, Financial Times of April 4, 2003.  Documentation of HSBC's Household's predatory lending continue to flow in, including in response to Freedom of Information rulings in such states as Indiana and Texas. <<snip>>

Lovely! (NOT!  >:(  )

Now, back to the "HSBC Watch" blog for this goodie:

"How To Scr*w the Consumer" now has a Co-Author...Metris!

The deal between HSBC Finance and Metris, which issues credit cards through its Direct Merchants Credit Card Bank subsidiary, is expected to close in the fourth quarter of 2005. It will see Metris become a wholly-owned subsidiary of HSBC. As Metris is a specialist in non-standard consumer finance, the purchase will see HSBC further build on the expertise it gained in this area following its acquisition of Household Finance in 2003. “HSBC learned that Inner City Press, Acorn, Household - HSBC Watch and others will not let the nation forget about Household International and predatory lending. HSBC only instituted controls demanded by Household’s $484 million nationwide settlement. Otherwise nothing really changed but the name and more experience in how to thwart investigations at state and federal levels” said consumer advocates at Household - HSBC Watch.

So watch out for the "Perfect Storm" here!  And you thought WaMu/Providian is bad...

And, how did Metris gain the expertise that HSBC so wanted?  Well, when you read about the origins of Metris, you will no longer wonder how they learned the "tricks of the trade":

Fingerhut Started Metris

Metris was created in 1998 when it was spun off from catalog retailer Fingerhut Cos. The company’s marketing of credit cards to lower-income households in the late 1990s and early 2000s increased defaults and delinquencies, leading to combined losses of $149.3 million in 2002 and 2003. HSBC Finance Corporation bought Metris, as announced today (August 4, 2005). Former predatory lender Household International, now part of HSBC and called called HSBC Finance Corporation, will handle former Metris accounts said Household - HSBC Watch consumer advocates.

Yes, the (supposedly) dead catalog company with 90,000 lives--Fingerhut--was responsible for Metris.  And, Metris' business model...which fits in perfectly with that of Household...

And, what else did Mertis have to offer HSBC?  How about this deal with Discover?:


Metris Will Issue Cards on the Discover Network

Metris Cos. Inc. has reached an agreement with Discover Financial Services to issue cards on the Discover network. Not only will this build volume for the Discover network, but it puts Discover one step closer to a similar deal with Metris parent company HSBC Holdings that would offer Discover cards to HSBC customers. David Nelms, CEO of Discover, said the Metris agreement was one more step towards broadening our coverage of participating issuers. When the HSBC purchase of Metris concludes later this year, Nelms said "our expectation is that HSBC will become an issuer" as well. If this happens, HSBC would become the first retail banking company to issue Discover cards.

The credit card landscape has certainly changed from just three years ago when Visa and MasterCard rules prohibited member banks from issuing Discover or American Express card products. The last obstacle to such deals fell in October 2004 when the U.S. Supreme Court declined to review an appeal by Visa and MasterCard of a lower court ruling that struck down the associations' restrictions. Since then American Express has entered into joint marketing deals with MBNA and other major retail banks.

Nelms told the American Banker that the Metris deal would give Discover access to a new set of customers. He noted that "some of Metris customers are people who do not qualify for Discover cards, but are much more likely to qualify for cards that Metris issues. It's a way for consumer to get a card that's issued on the Discover network, and it enables us to get volume on our network without changing our credit scores or taking any additional risk on the Discover card." From Metris standpoint, the deal gives its direct marketing campaign a boost. Matt Melius, an Executive Vice President at Metris and CEO of its Direct Merchants Credit Card Bank said "everyone will tell you if you mail the same card marketing pieces over and over, eventually you start to lose some of the effect, and you have to look for ways to freshen that up. Being able to issue a product on the Discover network gives us a new twist to the same pool."

And, did you think HSBC would pass up such an opportunity to hide their sins?

And, while some made a killing on this merger deal, other investors did not:

August 04, 2005
Trading day: IQ upgrade

(Temporarily) Smarter, but another lesson learned

Suddenly, I'm smarter. With the markets flat yesterday, I had one of my best-ever days, and was up another 1.5% today. We're talking about clawing back losses here, not making profits - let's face it, I'm back to where I was at the open Monday - but any port, every dog, whatever. Green is good.

I only traded once today: I unloaded the ADBE (Adobe Systems) short at $27, for a 16% gain. However HSBC made a trade for me, and I'm distinctly unhappy about it.

ShaftDuring June, I assembled a long position in credit-card issuer Metris Cos (MXT) at an average $13.85. I first read about the company on Tom Brown's estimable, where he and his team wrote extensively about the progress it had made in paying-down debt and generally cleaning up its act; I pulled the trigger about the time that Washington Mutual (WM) bought Providian (PVN) - and before the Bank of America (BAC)-MBNA (KRB) deal; I saw it as a recovery story, with any takeover offering the possibility of a nice upside surprise.

So, the takeover was announced today. HSBC will buy MXT for $1.59 billion, or a [@#$%^ miserable - Ed] 1.1% premium over last night's close. MXT lost 2.5% today, closing at $14.46 today on the news that Metris shareholders will receive $15 when the deal closes in the fourth quarter. Volume was 7.7 million shares, or a mere 12-times the 90-day average. The transaction is subject to shareholder and regulatory approval, and resolution of a possible US Securities and Exchange Commission enforcement action over its accounting for loan losses in 2001.

Here's what I take from the deal, and the market reaction:

    * Shareholder approval is a done deal. Thomas H. Lee Partners LP, has a 44% voting stake and will receive $682.6 million of the purchase price; it originally got involved in 1998, paying $300 million for a 29% holding, according to Reuters.
    * Regulatory approval won't be an issue; HSBC's current US credit card business is the sixth largest in the US, and the acquisition will not change its ranking.
    * Nobody's expecting a counter, or any kind of bidding war, despite the fact that with $5.9 billion of managed credit card loans as of June 30, Metris was the third largest 'independent' credit card issuers left standing (until today) behind the much larger American Express (AXP) and Capital One (COF).

Given the progress MXT has made in cleaning up its debt, and a strong argument that MXT did not need to put itself on the block, why was the company sold, and for such a [@#$%^ miserable - Ed] premium? If I was to venture into the realm of irresponsible uninformed speculation - perish the thought - I would wonder whether Messrs Lee et al are sweating the outcome of the SEC enforcement action. HSBC certainly is. Or have insiders decided that the debt picture has got about as good as it's going to get as the interest rate thing catches up with MXT's...ahem...near-prime customers, and are want an exit before the next balloon hits the fan?

I'm pondering what to do with the position. At today's close, I've got a 4.4% profit; if I hang on to the bitter end, I'll under up with something just under 9%, about which, I guess, one should not complain for a six month holding period. Assuming the deal does close on schedule. My choices appear to be of the Hobson's variety:

    * Back up the truck, based on the arb between today's close and the $15. But what about that condition relating to the SEC action that could delay the deal?  And the qualification that that a closing delay beyond December could reduce the price?  Those risks are material.
    * Bail immediately, taking myself out of any - however unlikely - counter-offer or value-enhancing proposals, and the - risk-filled, as above - upside.
    * Or, as I'll probably do, hang on for another day or two to see what, if anything, else the market says. At any bounce to, say, $14.70, in that time frame, I'll be gone.

But I'll be watching this one like a hawk. If Fido's Active Trader is slower than usual, it's because I've got alerts set up for dime intervals between $14 and $15.

The lesson: Look harder. Companies effectively controlled by private equity funds with a low cost base don't necessarily have the interests of other shareholders in mind. Or, given they know more about the business and its prospects than any ordinary shareholder, maybe they do.

No they don't know any more than you could, buddy!  All they know how to do is convince those who could have stopped them--like the SEC--to think otherwise!
« Last Edit: January 02, 2006 06:28:11 AM by Rottweiler »