Discover Financial Services acquiring Diners Club International for $165M from Citigroup
By MADLEN READ | Associated Press | Apr 7, 08 3:57 PM CDT
The world's oldest credit card brand is switching hands. The 58-year-old Diners Club International is being bought by Discover Financial Services LLC for $165 million (?105.14 million) from Citigroup Inc.
This means that in a couple years, people with Discover cards will get to use their cards when they travel outside the U.S.
The deal announced Monday comes as Discover tries to become accepted more outside the United States and among big corporate spenders, and as Citigroup sheds businesses it considers non-essential to raise cash and lower costs. Both companies have had a rough time over the past several months with deteriorating consumer credit conditions in the U.S. and the United Kingdom.
Discover shares rose 95 cents, or 5.5 percent, to $18.09 Monday after climbing as high as $18.84 earlier in the day.
Shares of Citigroup _ which bought Diners Club in 1981, when Citigroup was a smaller company known as Citicorp _ rose 52 cents, or 2.2 percent, to $24.60.
The Diners Club card came into being in 1950, when businessman Frank McNamara issued the charge card for people to use at restaurants in New York City. In the ensuing decades, Diners Club ballooned into a brand accepted at more than 8 million locations in 185 countries _ and used particularly among the corporate jet-setting crowd.
Discover is taking over Diners Club's payment network, brand and license agreements. It will not be providing credit to the Diners Club cardholders. That lending will continue to be done by the existing institutions that issue Diners Club cards, like Citigroup. Rather, Discover will be making money by processing the transactions.
David Nelms, Discover's CEO, said in a conference call Monday with investors that he expects the deal will eventually boost dollar volume at the company's third-party payments business by 30 percent, and that segment's revenue by 60 percent.
Right now, over $30 billion (?19.12 billion) is spent each year with Diners Club cards outside North America by more than 80,000 commercial and business clients.
Discover expects the deal with Citigroup to be completed within three months, and the total integration of Diners Club to take two to three years. After that, Diners Club cardholders will be able to use their cards where Discover cards are accepted, and vice versa.
Discover, which became independent from the investment bank Morgan Stanley last summer, said late last month that profit for the first quarter of 2008 fell 65 percent to $81.2 million (?51.74 million) after getting rid of Goldfish, its struggling U.K. card business, and preparing for more defaults from U.S. cardholders.
Red Gillen, a card industry analyst at the research and consulting firm Celent, called Discover's acquisition of Diners Club a "major salvo" for the card company. He wrote in a note that the deal suggests that Discover is targeting American Express Co.'s specialty: the high-end, corporate travel-and-entertainment merchant sector.
"With this acquisition, Discover has certainly upped the ante in the card market," Gillen wrote, "but it will soon have to prove that its strategy and investments are chipping away at the other major payment brands."
Of the four major U.S. card brands _ American Express, Visa, MasterCard and Discover _ Discover has the lowest market share.
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AP Business Writer Stephen Bernard contributed to this report.
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