McLean-based Capital One Corp. and New Orleans-based Hibernia Corp. agreed yesterday to cut about half a billion dollars from the price of their proposed merger, after a study of the impact Hurricane Katrina had on Hibernia's banking facilities and business in Louisiana.
Hibernia is Louisiana's largest bank, and the price reduction is the most concrete assessment yet of the storm's toll on a major business with deep roots in the local economy. It amounts to a cut of about 9 percent from the $5.5 billion that Capital One originally agreed to pay for Hibernia -- mostly attributable, analysts said, to the likelihood that several hundred million dollars of commercial and consumer loans in the New Orleans area will have to be written off as uncollectible.
After a week of investigation in which Capital One executives hopped on helicopters to survey damage to Hibernia's branches and examined the ability of Hibernia, its depositors and borrowers to recover from the disaster, both sides agreed the price should be decreased. Completion of the merger, which had been scheduled for Sept. 1, has been delayed until later this year, assuming Hibernia shareholders agree.
"This city, the city we all knew, has been changed overnight," Hibernia chief executive J. Herbert Boydstun said in an interview yesterday. "A city of basically 500,000 people has gone to basically no population at all."
The merger puts Capital One in a starkly different position than when it first agreed to buy Hibernia six months ago. Conceived as a bid to diversify beyond its core credit card business, the deal makes Capital One a major player in the economic recovery of a region suffering through what is expected to be the costliest natural disaster in U.S. history.
Capital One chief executive Richard D. Fairbank, in a written statement, acknowledged that while the deal remained on track, it had become riskier given the uncertainty surrounding what will become of New Orleans. About 60 of the bank's 321 branches remained closed yesterday, and the company said that 21 had sustained "significant damage."
The merger "will generate significant shareholder value over time," Fairbank said, but "no one can predict the impact of Katrina with certainty."
Capital One and Hibernia said the reduced price reflected an assessment of Hibernia's facilities, including its branch network and its iconic headquarters building on Carondelet Street in the city's central business district, which has been without power and lapped by a foot of water covering its first floor for more than a week.
The two companies also sought to quantify the expected impact on Hibernia's loan portfolio, and on its "future business prospects, including the significant federal and state aid and insurance proceeds expected to be received by victims of the hurricane in Louisiana."
Edwin Groshans, a financial services analyst at Fox-Pitt, Kelton Inc. in New York, said he estimated that $450 million to $550 million in Hibernia loans will be affected by the storm, most of them unsecured commercial and consumer loans. Real estate loans, such as mortgages, typically are fully insured in the event of a total loss, he said.
"Only time will tell if the lower price was enough" to reflect the economic loss caused by the storm, Groshans said. "The big question, and the big concern, is will all those customers move back? Will the area recover? We think so. But will the aid in the interim be enough to keep businesses and economy viable? History shows that cities recover from things like this. It's just a matter of time."
Speaking by phone from the temporary office in Baton Rouge where he has been since the storm hit, Boydstun said his main task has been to get Hibernia back up and running after the storm.
"The first and most daunting challenge was just getting in touch with everyone," said Boydstun, a Mississippi native who has been a banking executive in New Orleans since the 1970s. About 3,000 Hibernia employees (out of 6,700 total) live in areas primarily affected by Katrina. Of those 3,000, Hibernia hasn't been able to contact 1,000, Boydstun said.
Boydstun expressed confidence that New Orleans would be rebuilt.
"It can return to a grand city," he said. "I really do think you're going to see a rebirth here. With federal assistance and the determination of the people, it will be rebuilt. It's just not going to be a fast process."
Hibernia is the largest bank in hurricane-ravaged Louisiana.