Washington Mutual to buy Providian for $6.45B

Washington Mutual Inc. (WM), the largest U.S. savings and loan, on Monday said it agreed to buy credit card issuer Providian Financial Corp. (PVN) for $6.45 billion, expanding its focus on middle-market consumers.

The stock-and-cash transaction values Providian at $18.71 per share, a 4.2 percent premium over its closing price on Friday.

Kerry Killinger, Washington Mutual's chief executive, said the transaction will diversify his company's consumer business, adding high-yielding credit card assets and fee income. Seattle-based Washington Mutual is expanding in retail banking amid a slowdown in its mortgage business.

"Providian is a highly profitable business with solid credit quality," he said in a statement. "Its focus on middle market consumers makes Providian a natural fit."

The transaction is expected to close in the fourth quarter and add to profit within one year, Washington Mutual said.

The purchase is Killinger's first major acquisition since Washington Mutual paid $5 billion for New York's Dime Bancorp Inc. (search) in January 2002, bank spokesman Alan Gulick said.

San Francisco-based Providian will become Washington Mutual's fourth major business unit. The others are retail banking, home loans and commercial banking.

Providian once catered to consumers with poor credit histories, and it grew rapidly in the late 1990s. But it later suffered, and its stock fell 97 percent, as the economy soured and more customers defaulted. Providian has since repositioned itself and raised its lending standards.

Providian will continue to operate out of San Francisco, and Washington Mutual plans to retain company management.

Joseph Saunders, who became Providian's chief executive in 2001, will run the credit card business and report to Stephen Rotella, Washington Mutual's chief operating officer.

Washington Mutual hired Rotella from J.P. Morgan Chase & Co. (JPM) in December to help orchestrate a turnaround. The bank is the No. 3 U.S. mortgage lender, but it laid off roughly 40 percent of its mortgage staff in the year ended March 31.

Providian reported first-quarter net income of $133 million, or 40 cents per share, on net revenue of $525.1 million. Its shares remain well below their $68.09 peak, reached in April 1999, but are far above their $2 low of November 2001.

Providian shareholders will be paid based on an exchange ratio of 0.45 of a Washington Mutual share for each Providian share. Washington Mutual will pay 89 percent of the purchase price in stock and 11 percent in cash.

Lehman Brothers Inc., Morgan Stanley and the law firm Simpson Thacher & Bartlett LLP advised Washington Mutual. Goldman Sachs & Co., Citigroup Global Markets Inc. and the law firm Wachtell, Lipton, Rosen & Katz advised Providian.