Special Situation Investing

Wednesday, December 20, 2006

Morgan Stanley (MS) to Spinoff Discovery

Just a quite note that Morgan Stanley has announced it will be spinning off it's Discover credit card unit. From the article:

The move comes as rival Visa International plans to go public in 2007, following in the footsteps of Mastercard Inc.'s banner listing earlier this yea

Morgan Stanley Chief Financial Officer David Sidwell said the outlook for Discover is bright. The announcement of the spinoff comes at a time where credit card companies are white hot -- Bank of America Corp. earlier this year acquired MBNA Corp. for $35 billion, and shares of Mastercard have doubled since their May 2006 debut.

Discover's fourth-quarter profit more than tripled to $199 million. By comparison, Morgan Stanley's retail brokerage profit rose to $171 million from $84 million last year.


The spinoff is expected to cost Discover up to $50 million in higher funding and overhead costs. The spinoff is expected to add up to $95 million per year in costs for Discover, and the company sees some $40 million of overhead savings annually.

Apparently, the spinoff may result in a downgrade to the new unit's credit rating:

Moody's said it will review what effect the "removal of implied parental support from Morgan Stanley" would have on Discover's credit.

Fitch Ratings said it may downgrade Discover's debt because the credit card issuer's credit is tied to support from its parent.

Standard & Poor's said it isn't considering downgrading Discover's debt because it thinks Discover's business prospects are unchanged.

Too early to give much of an opinion on this one. Let's see how it prices.


  • Merger Arbitrage Play:
    SJOE being bought for $40/shr by Old National Bank (ONB)
    20% annualized Spread

    Deal Vote on 1/29
    Net Worth Test only deal trigger - but seems very likely.

    Potential close on 1/31
    you do the work - this is just for public info.

    By Anonymous Anonymous, at 2:20 PM  

  • I am excited by this spin-off. I think one of the reasons Discover has been crushed by Mastercard, Visa, and Amex is that it has been under the heals of an investment bank. As an independent company it should improve on its dismal past performance. It will be interesting to see how it is priced.

    In an unrelated note on other spin-offs I sold my HBI position on what I thought were rather dismal earnings and took another look at SBH. I agree with you that it doesn't seem very compelling. Do you have an e-mail address I can send these off-topic comments to in the future? My e-mail is (velunders@hotmail.com) without the

    By Anonymous Bayard, at 2:05 PM  

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