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The Shareholder Forum

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Special Program

 

Independent Analysis of Shareholder Interests

in a merger transaction proposed by

Providian Financial Corporation

 

See

Program Index

 

 

Independent Analysis of Egan-Jones

 

 

 

The Egan-Jones Proxy Services division of Egan-Jones Ratings Co., an independent research firm which is recognized for its financial analyses of companies for institutional investor clients, published the report below on August 17, 2005 and granted permission for its use in this Forum program.

 

Egan-Jones Proxy Services
Proxy Report (ID#6014)

 

 

Meeting Info

PROVIDIAN FINANCIAL CORP

Ticker:

PVN

CUSIP:

74406A102

Meeting type:

special

Meeting date:

8/31/2005

Record date:

8/1/2005

 

 

Proposals:

  • Proposal 1 - "Adoption of the Agreement and Plan of Merger": To adopt the Agreement and Plan of Merger, dated as of June 5, 2005, by and between Washington Mutual, Inc. and Providian Financial Corporation, as it may be amended from time to time, pursuant to which Providian will merge with and into Washington Mutual.

  • Proposal 2 - "Adjournment of the Special Meeting": To approve an adjournment of the special meeting, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement.

Recommendations:

We recommend that clients holdings shares of PROVIDIAN FINANCIAL CORP vote:

Proposal

Egan-Jones Recommendation

Management Recommendation

Proposal 1 - "Adoption of the Agreement and Plan of Merger":

AGAINST

FOR

Proposal 2 - "Adjournment of the Special Meeting":

AGAINST

FOR

 

Considerations and Recommendations:

Egan-Jones' review centered on the Proposals in the context of maximizing shareholder value, based on publicly available information.

  • Proposal 1 - "Adoption of the Agreement and Plan of Merger":

Company Profile:

Providian Financial Corporation. San Francisco-based Providian is a leading provider of credit cards to mainstream American consumers throughout the United States, with approximately 9.5 million customer relationships. At June 30, 2005, Providian and its subsidiaries had reported assets of approximately $14.08 billion. Providian’s primary line of business is its credit card business, which generates consumer loans primarily through Visa credit cards and also through MasterCard credit cards. Providian targets creditworthy customers across the broad middle to prime market segments, with a particular focus on middle market customers who are underserved by many large, prime-oriented card issuers. In originating new loans, Providian focuses on the parts of the middle and prime market segments that it expects to be the most profitable and creditworthy. Providian expects to generate profitable customer relationships through its proprietary marketing program, which emphasizes the portion of the market it refers to as “mainstream America,” and through its partnership and co-branding marketing programs, which use targeted criteria to market its credit card products to creditworthy individuals associated with various groups and organizations with which Providian enters into arrangements to serve their members. “Mainstream America” refers to a target market composed of creditworthy people throughout the United States generally defined by Providian’s credit, income, demographic, and psychographic criteria.

Washington Mutual, Inc. With a history dating back to 1889, Washington Mutual is a retailer of financial services that provides a diversified line of products and services to consumers and commercial clients. At June 30, 2005, Washington Mutual and its subsidiaries had reported assets of $323.53 billion. Washington Mutual currently operates more than 2,400 retail banking, mortgage lending, commercial banking and financial services offices throughout the United States. Washington Mutual strives to be the nation’s leading retailer of financial services for consumers and small businesses and plans to achieve this by building strong, profitable relationships with a broad spectrum of consumers and businesses. Expanding its retail banking franchise and achieving efficiencies in its operations will be critical to its future success.

Following the acquisition of the three largest California-based thrift institutions in the latter part of the 1990s, Washington Mutual continued to expand nationally by acquiring companies with strong retail banking franchises in Texas and the greater New York metropolitan area. During this period, Washington Mutual developed and launched its innovative retail banking stores that serve customers in an open, free-flowing retail environment. With the goal of combining its strengths as a deposit taker and portfolio lender with those of a mortgage banker, Washington Mutual also expanded its presence in the home loan origination and servicing businesses through acquisitions made from 1999 through 2002. These mortgage banking acquisitions also served to further extend its national footprint.

Structure of the Merger

Subject to the terms and conditions of the merger agreement, and in accordance with Washington and Delaware law, at the completion of the merger, Providian will merge with and into Washington Mutual. Washington Mutual will be the surviving corporation in the merger and will continue its corporate existence under the laws of the State of Washington. Upon completion of the merger, the separate corporate existence of Providian will terminate. Immediately following completion of the merger, Providian’s wholly-owned depository institution subsidiary, Providian National Bank, will merge with and into Washington Mutual’s wholly-owned depository institution, Washington Mutual Bank, and the separate corporate existence of Providian National Bank will terminate.

Each share of Washington Mutual common stock issued and outstanding at the effective time of the merger will remain issued and outstanding as one share of common stock of Washington Mutual, and each share of Providian common stock issued and outstanding at the effective time of the merger (other than shares for which appraisal rights have been perfected and shares owned directly by Providian or Washington Mutual) will be converted into the right to receive a combination of cash and Washington Mutual common stock. After completion of the merger, former Providian stockholders will own approximately 13.5% of the outstanding common stock of the combined company and continuing Washington Mutual stockholders will own approximately 86.5% of the outstanding common stock of the combined company.

The consideration will be determined based on a fixed exchange ratio of 0.45 Washington Mutual common shares per Providian common share, 89% in the form of Washington Mutual common stock and 11% in the form of cash. Based on the closing price of Washington Mutual’s common stock of $41.57 per share on June 3, 2005, this implies a value for the merger consideration of $18.71 per share of Providian common stock  representing total equity value of $6,452 million.

Background of the Merger

The management of Providian has from time to time explored and assessed, and has discussed with its board of directors, various strategic options potentially available to Providian which included the possibility of, among other things, business combinations involving Providian and other financial institutions, particularly in view of the increasing competition and ongoing consolidation in the financial services industry, as well as the requirements of Providian’s regulatory agreements entered into in 2001 and the related capital plan. Providian and its financial advisors had periodic contacts and discussions with other financial institutions regarding their respective companies, industry trends and developments, and potential business combinations or other strategic initiatives including Washington Mutual.

During this period Washington Mutual has also explored ways, both through acquisitions and by internal expansion, to enhance its consumer banking growth while strengthening its leadership position in the middle-market customer segment.

In late March 2005, in an industry conference, Joseph Saunders, Chairman, President and CEO of Providian, and Kerry Killinger, Chairman and CEO of Washington Mutual, met and had general discussions regarding the financial services industry, including the credit card industry in particular, and their respective companies. In late April 2005, the parties executed a customary confidentiality agreement.

Over the ensuing weeks, representatives of Providian and Washington Mutual continued periodic informal discussions, including discussions regarding the potential benefits of a combination of the two companies, as well as potential transaction valuations and preliminary due diligence discussions.

In addition, members of Washington Mutual’s management team periodically updated the Corporate Development Committee of Washington Mutual’s board of directors at special meetings held for the purpose of evaluating the potential transaction with Providian.

In late May 2005, Messrs. Saunders and Killinger met again and continued discussions regarding each company’s perspective on transaction valuation. As a result of these discussions, assuming satisfactory conclusion of due diligence and negotiation of the terms of a definitive agreement, they were each prepared to present to their respective boards of directors a proposed merger with an exchange ratio of 0.45 shares of Washington Mutual common stock for each share of Providian common stock. Throughout late May 2005 and early June 2005, Washington Mutual and its representatives continued their due diligence review, which included on-site due diligence visits and additional meetings with Providian’s management. Also during this time, Providian and its legal and financial advisors continued their due diligence review of Washington Mutual’s operations.

The Providian board of directors held special meetings of the board on May 27, 2005 and June 2, 2005, at which Mr. Saunders presented to the board the proposal from Washington Mutual, and updated the board on the background of his meetings and conversations with Washington Mutual. Also during these meetings, Mr. Saunders updated the board regarding Washington Mutual’s strong interest in and need for management continuity, including the retention of the top executives of Providian to continue to operate the combined company’s credit card business, which would be a new line of business for Washington Mutual. Mr. Saunders noted in this regard that Washington Mutual would require key members of Providian management to enter into employment agreements with Washington Mutual in the event that Washington Mutual and Providian entered into a definitive merger agreement.

During the week of May 30, 2005, Washington Mutual and Providian continued to conduct mutual due diligence, including on-site diligence, involving senior executives from both companies, as well as their outside financial and legal advisors. Also during this time, the parties and their outside counsel began drafting and negotiating the terms of the merger agreement and the related transaction documents, including proposed employment agreements between Washington Mutual and several key executives of Providian.

On June 4, 2005, the board of directors of Providian met to discuss and analyze Washington Mutual’s offer as reflected in the proposed merger agreement. Mr. Saunders reviewed for the Providian board of directors the background of discussions and negotiations with Washington Mutual, including the proposal to provide for the payment of 11% of the deal consideration in cash based on the market value of the Washington Mutual common stock upon completion of the merger and the fixed 0.45 exchange ratio. Providian’s financial advisors, Citigroup and Goldman Sachs, presented financial analyses related to the proposed merger and responded to questions posed by the Providian board of directors. In connection with the deliberation by the Providian board of directors, Citigroup rendered to the Providian board of directors its oral opinion (subsequently confirmed in writing on June 5, 2005), that, as of the date of its opinion and based upon and subject to the factors, assumptions, procedures, limitations and qualifications set forth in its written opinion and other factors Citigroup considered relevant, the merger consideration to be received for each share of Providian common stock pursuant to the merger agreement was fair from a financial point of view to the holders of such shares. In connection with the deliberation by the Providian board of directors, Goldman Sachs rendered to the Providian board of directors its oral opinion (subsequently confirmed in writing on June 5, 2005), that, based upon and subject to the factors, assumptions, procedures, limitations and qualifications set forth in its written opinion, the consideration to be received by the holders of Providian common stock, taken in the aggregate, pursuant to the merger agreement was fair from a financial point of view to such stockholders.

Representatives of Wachtell, Lipton, Rosen & Katz, legal advisors to Providian, discussed with the Providian board of directors the legal standards applicable to its decisions and actions with respect to its evaluation of merger proposals, and reviewed the legal terms of the merger proposal and the related employment agreements.

Following these discussions, the Providian board of directors determined that the merger, the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of Providian and its stockholders, and the directors voted unanimously to approve the merger with Washington Mutual and to approve and adopt the merger agreement.

The board of directors of Washington Mutual held a meeting on June 5, 2005, to review and consider the merger, the merger agreement and the related transactions.

Management of Washington Mutual, together with representatives of Simpson Thacher & Bartlett LLP, its legal advisors, and Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated, its financial advisors, discussed with the board the business, financial condition and prospects of Providian and the terms of the proposed merger agreement and the proposed employment agreements with members of Providian’s executive management team. Following discussion among Washington Mutual’s board of directors and Washington Mutual’s management concerning the transaction, the board of directors of Washington Mutual unanimously approved the merger agreement, the employment agreements and the transactions contemplated by the merger agreement.

In the evening of June 5, 2005, Washington Mutual and Providian entered into the merger agreement. On the morning of June 6, 2005, Washington Mutual and Providian issued a joint press release announcing the transaction.


Analysis and Considerations:
Egan-Jones' review centered on the strategic and financial aspects of the proposed transaction in the context of maximizing shareholder value. In doing so, we view the following as significant factors in evaluating the proposed transactions:

Key Positive Components

    1. Its knowledge of Providian’s business, operations, financial condition, earnings and prospects, including the challenges presented by the relatively high cost of funding faced by Providian, its non-investment grade debt rating, which subjects it to volatility in the cost of raising money in the capital markets, and the requirements of Providian’s regulatory agreements entered into in 2001 and the related capital plan.

    2. The complementary strengths of the two financial institutions, and in particular, the expectation that Washington Mutual’s national multi-channel distribution network, marketing expertise and customer base would provide opportunities for growth in Providian’s credit card business.

    3. Citigroup’s and Goldman Sachs' written opinion to the Providian board of directors that, as of June 5, 2005, and based upon and subject to the factors, assumptions, procedures, limitations and qualifications set forth therein, the merger consideration to be received for each share of Providian common stock pursuant to the merger agreement was fair from a financial point of view to the holders of such shares.

    4. The expected treatment of the merger as a “reorganization” for United States federal income tax purposes;


Key Negative Components

    1. The financial terms of the merger, including the fact that, based on the closing price on the New York Stock Exchange of Washington Mutual common stock on June 3, 2005 (the last trading day prior to the execution and announcement of the merger agreement), given the implied per share merger consideration value of approximately $18.71, the acquisition price as of June 3, 2005 represented only an approximate 4% percent premium over the closing price of Providian shares on the New York Stock Exchange as of that date, a 9.1% premium over the average closing price of Providian shares on the New York Stock Exchange for the prior month and a 44.7% premium over Providian’s fifty-two week low closing price. As such, the merger consideration value is inadequate.

    2. Because the market price of Washington Mutual common stock will fluctuate, Providian stockholders will not know until the closing of the merger the value of the shares of Washington Mutual common stock or the amount of cash that will be issued or paid in the merger.

    3. The structure of the merger and the terms of the merger agreement, including the fact that Providian stockholders would receive the merger consideration in a combination of 11% cash and 89% Washington Mutual common stock, and including the stockholder approval covenants and provision for the payment of a termination fee of up to $225 million in certain events, which the Providian board of directors understood could limit the willingness of a third party to propose a competing business combination transaction with Providian following execution of the merger agreement.

    4. Providian has agreed that it, its subsidiaries and their officers, directors, employees, agents, representatives and affiliates will not, directly or indirectly: (i) initiate, solicit, encourage or knowingly facilitate any inquiries or proposals with respect to any acquisitional proposal; (ii) engage in any negotiations concerning, or provide any nonpublic information to, or have any discussions with any person relating to, any acquisition proposal; (iii) waive, terminate, modify or fail to enforce any provision of any contractual "standstill" or similar obligation of any person other than Washington Mutual or its affiliates; or (iv) approve or recommend, or propose to approve or recommend, any acquisition proposal for the Company to receive a superior proposal which could be more favorable from a financial point of view to its stockholders that the merger with Washington Mutual.

    5. The regulatory and other approvals required in connection with the merger and the likelihood such approvals would be received without unacceptable conditions.

    6. The potential risk of diverting management focus and resources from other strategic opportunities and from operational matters while working to implement the merger.

    7. The fact that some of Providian’s directors and executive officers have other financial interests in the merger that are in addition to their interests as Providian stockholders, including as a result of employment and compensation arrangements with Providian and the manner in which they would be affected by the merger, as well as the new employment agreements that certain of these persons entered into with Washington Mutual in connection with the merger. The following are the proposed arrangements based on the merger agreement upon completion of the merger:

      • Equity Compensation Awards. The merger agreement provides that upon completion of the merger, each Providian stock option, including those held by executive officers and directors of Providian, will vest and be converted into Washington Mutual stock options based on the exchange ratio in the merger. In addition, each other stock-based award based upon shares of Providian common stock, including those held by executive officers and directors of Providian, other than stock options and restricted stock, will vest and be converted.

      • Current Providian Change of Control Employment Agreements. Each of Providian’s executive officers, including Messrs. Saunders, Vuoto, and Wilcox and Mses. Richey and Chen, is party to a change of control employment agreement (or in the case of Mr. Saunders, an employment agreement providing for the same severance benefits as the change of control agreements). As described further below, each of Messrs. Saunders, Vuoto, and Wilcox and Ms. Chen, as well as other executives, has entered into an employment agreement with Washington Mutual which, as of completion of the merger, will become effective and will supersede the current Providian change of control agreements (and the current employment agreement between Mr. Saunders and Providian). There are also other Providian executive officers with current Providian change of control agreements who will not enter into employment agreements with Washington Mutual. Each of  the current change of control agreements, each executive officer will be entitled to a lump sum payment equal to the sum of (a) the executive officer’s base salary through the date of termination and any bonuses that have been determined, but not paid, (b) a pro rata bonus through the date of termination based on the higher of (1) the executive officers’ most recent annual bonus or (2) the highest bonus paid to the executive officer during the three years prior to the change of control (the “reference bonus”), (c) an amount equal to three times the sum of (x) the executive officer’s annual base salary and (y) the executive officer’s reference bonus and (d) continued welfare benefits for three years after any such termination of employment.

      • Washington Mutual Employment Agreement with Joseph Saunders. Washington Mutual has entered into an employment agreement, dated as of June 5, 2005, with Joseph Saunders, the current Chairman and Chief Executive Officer of Providian, which upon completion of the merger will become effective and will supersede his current employment agreement. Upon completion of the merger, Mr. Saunders will receive a lump sum cash payment equal to the three-times payment that he would have received pursuant to his current Providian employment agreement described above immediately following completion of the merger. In addition, upon completion of the merger, Mr. Saunders will receive shares of Washington Mutual restricted common stock having a value of $2,000,000 as of the date of the completion of the merger, and options to purchase a number of shares of Washington Mutual common stock equal to three times the number of restricted shares granted to Mr. Saunders upon completion of the merger. During the term of Mr. Saunders’ employment under his agreement with Washington Mutual, Mr. Saunders will receive an annual base salary of $800,000. In addition, for each fiscal year ending during the term of Mr. Saunders’ employment under this agreement, Mr. Saunders will be eligible to earn an annual cash bonus based on a target of 200% of Mr. Saunders’ annual base salary. During the term of Mr. Saunders’ employment under this agreement, Mr. Saunders will receive long-term incentive awards at the same time, at such levels and on substantially the same terms and conditions, as similarly situated executives of Washington Mutual.

      • Washington Mutual Employment Agreements with Other Executives. Washington Mutual has entered into employment agreements, dated as of June 5, 2005, with each of Messrs. Vuoto and Wilcox and Ms. Chen and certain other Providian executives, which, upon completion of the merger, will become effective and supersede their current change of control agreements. In consideration for canceling their current Providian change of control agreements, each of these executives will receive a lump sum cash payment payable in two installments and equal to the three-times payment that he or she would have received pursuant to his current change of control agreement. Upon completion of the merger, each of Messrs. Vuoto and Wilcox and Ms. Chen will receive a grant of a number of shares of Washington Mutual restricted common stock having a value of $400,750 as of the date of the completion of the merger, and options to purchase a number of shares of Washington Mutual common stock equal to three times the number of restricted shares granted to the executive upon completion of the merger. During the term of the executive’s employment under the employment agreement, each of Messrs. Vuoto and Wilcox and Ms. Chen will receive an annual base salary of $400,000, $350,000, and $350,000, respectively. In addition, for each fiscal year ending during the term of the executive’s employment under the employment agreement, each of Messrs. Vuoto and Wilcox and Ms. Chen will be eligible to earn an annual cash bonus based on a target of 100 percent of the executive’s annual base salary. During the term of the executive’s employment under the employment agreement, each of Messrs. Vuoto and Wilcox and Ms. Chen will also receive long-term incentive awards at the same time, at such levels and on substantially the same terms and conditions, as similarly situated executives of Washington Mutual.

      • Indemnification and Insurance. Washington Mutual has agreed to indemnify and hold harmless all past and present officers and directors of Providian and its subsidiaries in their capacities as such against all losses, claims, damages, liabilities, costs, expenses, judgments, fines and amounts paid in settlement to the fullest extent such persons would be entitled to such indemnification under applicable law and the by-laws of Providian as in effect on the date of the merger agreement.


We also considered the Joint Financial Analyses of Citigroup and Goldman Sachs, as described in the proxy:

Transaction Overview and Indicated Transaction Multiples. Citigroup and Goldman Sachs reviewed with the Providian board of directors the basic terms of the merger, including the following:
• consideration to be determined based on a fixed exchange ratio of 0.45 Washington Mutual common shares per Providian common share, 89% in the form of Washington Mutual common stock and 11% in the form of cash;
• implied value for the merger consideration of $18.71 per share of Providian common stock (based on the closing price of Washington Mutual’s common stock of $41.57 per share on June 3, 2005), representing total equity value of $6,452 million; and
• pro forma percentage ownership by current Providian stockholders of 13.5% of the combined company, based on fully diluted shares per the treasury stock method.

Citigroup and Goldman Sachs calculated for the Providian board of directors various multiples and premiums resulting from the merger. These calculations were based on historical information, estimates from Institutional Brokerage Estimate System, or IBES (a data service that compiles estimates issued by securities analysts) and certain financial analyses and forecasts for Providian prepared by its management taking into account the 2005 Capital Plan of Providian National Bank (the “Capital Plan May Forecast”).

Citigroup and Goldman Sachs calculated the percentage premium of the implied per share value of the merger consideration (based on the closing price of Washington Mutual common stock on June 3, 2005) over:

• the closing price per share of Providian common stock on June 3, 2005 (the last trading day prior to the presentation made by Citigroup and Goldman Sachs to the Providian board of directors);

• the average closing prices per share of Providian common stock for the one-week, one-month and year-to-date periods ended June 3, 2005;

• the highest and lowest closing prices per share in the 52-week period ended June 3, 2005; and

• Providian’s managed receivables as of March 31, 2005, calculated as transaction value less book value and loan loss reserves (net of estimated deferred tax asset).

The following table presents the results of Citigroup’s and Goldman Sachs’ calculations:

Premium to:

 

Share Price at June 3, 2005

4.2%

One-Week Average

5.8

One-Month Average

9.1

Year to Date Average

10.5

52-Weel High

2.3

52-Week Low

44.7

Managed Receivables

18.4

Citigroup and Goldman Sachs also calculated the ratio of the implied per share value of the merger consideration to Providian’s estimated earnings per share, or EPS, for each of fiscal years 2005 and 2006, its actual 2004 EPS and its book value as of March 31, 2005. The following table presents the results of Citigroup’s and Goldman Sachs’ calculations:

Price as a Multiple of:

 

2004A EPS

15.7x

Median IBES Estimates

 

2005E EPS

11.8x

2006E EPS

10.9x

Capital Plan May Forecast

 

2005E EPS

12.5x

2006E EPS

11.7x

Stated Book Value at March 31, 2005

1.9x

Implied Historical Exchange Ratio Analysis. Citigroup and Goldman Sachs calculated and reviewed the historical exchange ratios implied by dividing the daily closing price per share of Providian common stock by the daily closing price per share of Washington Mutual common stock for each trading day in the 52-week period ended June 3, 2005, as well as the average of these exchange ratios for this 52-week period and for other specified periods ended June 3, 2005, and the high and low implied exchange ratios during this 52-week period. Citigroup and Goldman Sachs then calculated the implied percentage premium represented by the exchange ratio of 0.45 to be used in calculating the merger consideration for the merger as compared with such historical ratios. The results of these calculations are set forth in the following table:

 

Implied Exchange Ratio

Implied Premium

June 3, 2005

0.43x

4.2%

One-Week Average

0.43

6.0

One-Month Average

0.41

9.6

Year-to-Date Average

0.41

7.6

One-Year Average

0.39

13.9

52-Week High

0.45

2.7

52-Week Low

0.34

31.7

Selected Companies Analysis—Providian. Citigroup and Goldman Sachs reviewed and compared certain financial information for Providian to corresponding financial information, ratios and public market multiples for the following publicly traded companies in the consumer finance industry:

Selected Monoline Credit Card Companies

Selected Bank Credit Card Issuers

MBNA Corporation

Citigroup Inc.

Capital One Financial Corp.

Bank of America Corporation

 

JPMorgan Chase & Co.

Although none of the selected companies is directly comparable to Providian, the companies included were chosen because they are publicly traded companies with operations that, for purposes of analysis, may be considered similar to certain operations of Providian.

The financial information used by Citigroup and Goldman Sachs for all companies in the course of this analysis was based on publicly available information as of June 3, 2005, IBES estimates and information provided by SNL Datasource. The multiples and ratios for each of the selected companies were based on the most recent publicly available information.

For the selected companies, Citigroup and Goldman Sachs calculated the ratios of June 3, 2005 closing stock price to:

• calendar year 2005 and 2006 IBES earnings estimates;

• stated book value and tangible book value; and

• 2006 IBES estimated earnings, as a multiple of IBES estimated long-term earnings growth.

Citigroup and Goldman Sachs then compared these measures to the corresponding values for Providian (using IBES and Capital Plan May Forecast earnings estimates for 2005 and 2006). The results of this analysis are summarized as follows:

Ratio

Selected Monoline Credit
Card Companies
Range

Selected Monoline Credit
Card Companies
Median

Selected Bank Credit
Card Issuers
Range

Selected Bank Credit
Card Issuers
Median

Providian
(IBES
Estimates)

Providian
(Capital Plan May Forecast)

Price/2005E Earnings

10.4x–10.8x

10.6x

10.8x–11.9x

11.3x

11.3x

12.0x

Price/2006E Earnings

9.7x– 9.7x

9.7x

10.2x–10.3x

10.3x

10.4x

11.2x

Price/Stated Book

2.0x– 2.2x

2.1x

1.2x– 2.3x

1.9x

1.9x

N/A

Price/Tangible Book

2.1x– 3.0x

2.6x

2.2x– 3.8x

3.6x

1.9x

N/A

Price/2006E P/E to Growth

0.7x– 1.0x

0.9x

0.9x– 1.1x

1.0x

0.8x

N/A

Citigroup and Goldman Sachs also calculated the selected companies’ estimated earnings growth rate from 2005 to 2006, based on IBES estimated earnings for each of those years, and compared this measure to the corresponding value for Providian (using IBES and Capital Plan May Forecast earnings estimates for 2005 and 2006). The following table presents the results of this analysis:

 

Selected Monoline Credit
Card Companies
Range

Selected Monoline Credit
Card Companies
Median

Selected Bank Credit
Card Issuers
Range

Selected Bank Credit
Card Issuers
Median

Providian
(IBES
Estimates)

Providian
(Capital Plan May Forecast)

2005E-2006E Earnings Growth

8.1%–11.5%

9.8%

5.9%–15.5%

9.5%

8.5%

6.7%

Citigroup and Goldman Sachs calculated and compared stock price to IBES earnings estimates for the period beginning January 1, 2002 and ended June 3, 2005, for each of MBNA Corporation, Capital One Financial Corp. and Providian. The following table presents the high, low and median multiples and the multiples as of June 3, 2005 resulting from this analysis:

 

MBNA

Capital One Financial

Providian (1)

High

17.3x

18.3x

30.9x

Median

12.8

11.6

14.1

Low

8.0

6.1

8.5

June 3, 2005

10.4

10.8

11.3

(1) Excludes price to forward earnings for Providian through April of 2002 as not meaningful because median IBES consensus estimates ranged from $0.00 to $0.03.

Citigroup and Goldman Sachs compared the historical total shareholder returns (calculated as the change in share price plus dividends) for the shares of Providian common stock and the common stock of each of MBNA Corporation and Capital One Financial Corp. for the three-year, one-year and year-to-date periods ended June 3, 2005. The following table presents the results of this analysis:

 

MBNA

Capital One Financial

Providian

Three-Year Total Return

(5.4)%

24.6%

130.0%

One-Year Total Return

(14.8)

9.9

29.6

Year-to-Date 2005 Total Return

(24.2)

(11.0)

9.0

Citigroup and Goldman Sachs also compared the share price appreciation for the shares of Providian common stock to the common stock of each of MBNA Corporation and Capital One Financial Corp. and also to the average for the selected bank credit card issuers for the period from January 1, 2002 through June 3, 2005. The following table presents the results of this analysis.

 

MBNA

Capital One Financial

Selected Bank Credit Card Issuers

Providian

Share Price Appreciation for Period 1/1/2002 – 6/3/2005

(9.4 )%

38.9 %

14.7 %

405.9 %

Selected Precedent Transactions Analysis. Citigroup and Goldman Sachs analyzed certain information relating to the following selected transactions in the specialty finance industry since January 1, 2002, which are divided into three groups:

Date Announced

Acquirer

Target

Credit Card Company Sales

 

 

August 18, 2004

Barclays PLC

Juniper Financial Corporation

February 3, 2004

Royal Bank of Scotland Group

People’s Bank

July 15, 2003

Citigroup Inc.

Sears, Roebuck & Co. Card Services

Other Specialty Finance Transactions

 

 

November 14, 2002

HSBC Holdings plc

Household International, Inc.

Providian Master Trust

 

 

January 15, 2002

JPMorgan Chase & Co.

Providian Master Trust

With respect to the financial information for the targets involved in the precedent transactions, Citigroup and Goldman Sachs relied on information from public filings, company press releases and investor presentations, as well as information published by Securities Data Corp. and SNL DataSource.

For each of the selected transactions, to the extent applicable, Citigroup and Goldman Sachs calculated and compared:

• the implied ratio of the price paid for the target in the transaction to:
(a) tangible book value of the target, based on the latest publicly available financial statements of the target available prior to the announcement of the acquisition;
(b) earnings of the target for the latest twelve months (“LTM”) of results publicly available prior to the time the transaction was announced; and
(c) estimated earnings of the target for the fiscal year in which the transaction was announced (“Estimated FY1”); and

• the implied premium represented by the price paid for the target in the transaction to:
(a) the closing price per common share of the target one month prior to the announcement of the transaction; and
(b) the target’s managed receivables (calculated as the price paid less the tangible book value of the target divided by the latest publicly available managed receivables of the target prior to the announcement of the acquisition).

The following table presents the results of this analysis for the selected transactions:

 

Price/ Tangible Book

Price/ LTM EPS

Price /
FY1 EPS

Premium/Market

Premium/Managed Receivables

Credit Card Company Sales

 

 

 

 

 

Barclays PLC / Juniper Financial Corporation

NA

NA

NA

NA

15.2%

Royal Bank of Scotland Group / People’s Bank

3.3x

NA

NA

NA

15.5

Citigroup Inc. / Sears, Roebuck & Co. Card Services

2.7x

7.3x

NA

NA

16.0

Other Specialty Finance Transactions

 

 

 

 

 

HSBC plc / Household International, Inc.

2.0x

6.8x

7.0x

6.9%

6.6%

ProvidianMaster Trust

 

 

 

 

 

JPMorgan Chase & Co. / Providian Master Trust

NA

NA

NA

NA

5.0%

Selected Precedent Credit Card Portfolio Sales Analysis. Citigroup and Goldman Sachs calculated the percentage premium paid over the aggregate amount of managed receivables in selected credit card receivables portfolio transactions since 1996 involving receivables greater than $2 billion. These percentage premiums were then applied to Providian’s aggregate amount of managed receivables. In order to derive an implied per share valuation for Providian, the resulting amount was increased by tangible equity and loan loss reserves (net of estimated deferred tax assets). The following table presents the results of this analysis:

Selected Credit Card Portfolio Transactions

 

Range

Median

Premium to Managed Receivables

6.5% – 22.0%

13.3%

Implied Valuation per Providian Share

$ 12.90 – $21.06

$16.45

The range of per share values resulting from this analysis compares to the implied value for the merger consideration of $18.71 per share of Providian common stock (based on the closing price of Washington Mutual’s common stock on June 3, 2005). The range of percentage premiums to managed receivables resulting from this analysis compares to the 18.4% premium over Providian’s managed receivables as of March 31, 2005 represented by the implied per share value of the merger consideration.

Dividend Discount Analyses. Citigroup and Goldman Sachs performed comparative dividend discount analyses to generate reference ranges for the implied present value per share of Providian common stock (1) assuming Providian continued to operate as a standalone company and (2) on a pro forma equivalent basis giving effect to the merger. They also performed this analysis for Washington Mutual common stock assuming Washington Mutual continued to operate as a standalone company.

These reference ranges were determined in each case by calculating the present value of the estimated future dividend stream of Providian, Washington Mutual and the combined company, respectively, for the years 2005 through 2010, plus the present value of the estimated terminal value of the common stock of Providian, Washington Mutual and the combined company, respectively, as of the end of calendar year 2010.

Citigroup and Goldman Sachs estimated reference ranges for the implied present value per share of Providian common stock, on a standalone basis, using the following alternative assumptions regarding the future performance of Providian:

• IBES EPS estimates for fiscal years 2005 and 2006; estimated EPS growth at the IBES long-term growth rate of 13.0% annually (or at alternative long-term growth rates of 12.0% and 14.0%) for 2007 through 2011; and no payment of dividends (the “Providian Street Case”); and, alternatively,
• the Capital Plan May Forecast EPS estimates for fiscal years 2005 and 2006; estimated EPS growth at assumed long-term growth rates of 5.0%, 7.5% and 10.0% annually for 2007 through 2011; and no payment of dividends (the “Capital Plan May Case”).

In each of the above cases, Citigroup and Goldman Sachs used the following assumptions:
• a terminal value of Providian common stock at the end of 2010 based on a range of price to earnings multiples of 10.0x to 12.0x applied to year 2011 projected earnings; and
• a range of discount rates of 10.0% to 14.0%.

Citigroup and Goldman Sachs also estimated reference ranges for the implied present value per share of Washington Mutual common stock, on a standalone basis, using the following assumptions:

• IBES EPS estimates for fiscal years 2005 and 2006;
• estimated EPS growth at the IBES long-term growth rate of 10.0% annually (or at alternative long-term growth rates of 9.0% and 11.0%) for 2007 through 2011;
• to the extent Washington Mutual’s tangible common equity to tangible assets (“TCE/TA”) ratio exceeds 5.5%, the excess capital would be used to repurchase common stock;
• increases in the Washington Mutual common stock dividend rate of $0.01 in each quarter over the prior quarter;
• a terminal value of Washington Mutual common stock at the end of 2010 based on a range of price to earnings multiples of 10.0x to 12.0x applied to year 2011 projected earnings; and
• a range of discount rates of 8.0% to 10.0%.

This analysis resulted in a reference range for the implied present value per share of Washington Mutual common stock, on a standalone basis, of $48.79 to $60.82.

Citigroup and Goldman Sachs then estimated reference ranges for the implied present value per share of Washington Mutual’s common stock on a pro forma equivalent basis after giving effect to the merger (which is referred to as the “combined company”), using the following assumptions:

• pro forma EPS estimates for fiscal years 2006 through 2011 with respect to Washington Mutual based on IBES estimates of EPS and EPS growth as adjusted by Providian’s management to reflect the effects of the merger;
• increases in the Washington Mutual common stock dividend rate of $0.01 in each quarter over the prior quarter;
• to the extent the combined company’s TCE/TA ratio exceeds 5.5%, the excess capital would be used to repurchase common stock;
• a terminal value of combined company common stock at the end of 2010 based on a range of price to earnings multiples of 10.0x to 12.0x applied to year 2011 projected earnings, reflecting the weighted average of Providian and Washington Mutual multiples based on net income contribution; and
• a range of discount rates of 8.0% to 10.0%, reflecting the weighted average of Providian and Washington Mutual net income contribution.

Citigroup and Goldman Sachs calculated the pro forma implied present value per share of Providian common stock, giving effect to the merger, by adding the following amounts: (i) the pro forma values per combined company share, multiplied by 0.40 (representing 89% of the merger exchange ratio of 0.45, to reflect the portion of the merger consideration to be paid in the form of shares of Washington Mutual common stock), and (ii) the discounted cash component of the merger consideration (representing 11% of the merger exchange ratio of 0.45), calculated based on the estimated price per share of Washington Mutual common stock at the closing of the merger, which was assumed to take place on December 31, 2005. This estimated price per share was determined by applying the current trading multiple for Washington Mutual common stock to Washington Mutual’s IBES estimated 2006 EPS.

The following table presents the results of these analyses with respect to Providian:

 

Range of Implied Values Per Providian Share

Providian (applying Providian Street Case)

$15.96 to $21.29

Providian (applying Capital Plan May Case)

$10.75 to $16.56

Providian (pro forma for merger)

$22.67 to $28.56

Portfolio Valuation Analysis—Providian. Citigroup and Goldman Sachs performed comparative portfolio valuation analyses to generate reference ranges for the implied present value per share of Providian common stock (1) assuming Providian continued to operate as a standalone company (the “Status Quo Case”) and (2) assuming Providian were to merge with a strategic partner (the “Strategic Case”). Based on certain assumptions reviewed with Providian management, Citigroup and Goldman Sachs developed a range of valuation outputs based on the implied present value per share of Providian’s existing portfolio (the “Existing Portfolio Value per Share”) and Providian’s new loan originations (the “New Originations Value per Share”).

The following table presents the results of this analysis:

Summary of Portfolio Valuation Output

 

Status Quo Case

Strategic Case

Existing Portfolio Value per Share

$12.20 – $14.04

$16.54 – $17.64

New Originations Value per Share

$ 0.07 – $ 1.82

$ 0.20 – $ 2.42

Pro Forma Merger Analysis. Citigroup and Goldman Sachs analyzed the pro forma impact of the merger on projected EPS for Washington Mutual, based upon earnings estimates from IBES for Providian and synergies for Providian prepared by Providian’s management as well as earnings estimates from IBES for Washington Mutual. The effect on EPS was calculated using various assumptions, including the following:

• the consideration is 89% Washington Mutual stock and 11% cash;
• the transaction closing date is in the fourth quarter of 2005;
• the conversion of Providian’s 4.00% Convertible Senior Notes due May 2008 and 2.75% Convertible Cash to Accreting Senior Notes due March 2016 into shares of Washington Mutual common stock at $18.71 (based on the closing price of Washington Mutual’s common stock of $41.57 per share on June 3, 2005);
• pre-tax cost operational synergies of $85.2 million in 2006, $229.2 million in 2007 and $347.6 million in 2008;
• pre-tax funding benefits of $9.0 million in 2006, $18.4 million in 2007 and $23.4 million in 2008;
• pre-tax income accretion from mark-to-market of deposits of $29.6 million in 2006, $18.9 million in 2007 and $12.1 million in 2008;
• a pre-tax restructuring charge of $95 million, phased in 50% in 2006 and 100% in 2007; and
• amortization of approximately $135 million after tax per year of purchase price premium attributed to identifiable intangibles over seven years.

For each of the years 2006, 2007 and 2008, Citigroup and Goldman Sachs compared the EPS of Washington Mutual common stock to the EPS, on both a GAAP basis and a cash basis, of the combined company common stock using the foregoing assumptions. The following table sets forth the results of this analysis:

 

GAAP Basis
Accretion / (Dilution)

Cash Basis
Accretion / (Dilution)

2006E EPS

(1.2)%

2.0%

2007E EPS

1.4

4.2

2008E EPS

3.2

5.8


In addition to the financial analyses described above, Citigroup and Goldman Sachs also reviewed the competitive environment of the U.S. credit card industry in terms of increasing market share concentration among the top five and top ten credit card issuers; the relative size and scale of large U.S. credit card issuers (as measured by market capitalization, total equity, credit rating and senior unsecured credit spreads); recent trends in receivables growth for the credit card industry; and volume and response rates for credit card mail solicitations.

Conclusion:
Based on our review of publicly available information on strategic, financial and business integration aspects of the proposed transaction, as well as various integration risks attending the merger, Egan-Jones, views the proposed merger as an undesirable approach to maximizing shareholder value. We believe that the proposed merger is not in the best interest of the Company and its shareholders because of the following factors: (i) the merger consideration value per share is inadequate; given an implied per share merger consideration value of approximately $18.71, the acquisition price as of June 3, 2005 represented only an approximate 4% percent premium over the closing price of Providian shares on the New York Stock Exchange as of that date, a 9.1% premium over the average closing price of Providian shares on the New York Stock Exchange for the prior month and a 44.7% premium over Providian’s fifty-two week low closing price; (ii) in light of the inadequacy of the implied value of the merger consideration, we are also critical of the fact that the Company failed to approach other potential acquirers which might well have agreed to pay a higher consideration value, before the Company agreed to the non-solicitation provision; and (iii) lastly, given the inadequate merger consideration value, we are troubled that some of Providian’s executive officers and directors have interests in the merger and have arrangements that are different from, or in addition to, those of Providian stockholders generally and which in particular would likely financially benefit them. Accordingly, we recommend that clients holding shares of Providian Financial Corporation vote "AGAINST" this Proposal.

  • Proposal 2 - "Adjournment of the Special Meeting":

The shareholders are being asked to approve an adjournment of the special meeting, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement. However, we believe that the proposed merger transaction in Proposal 1 is not in the best interest of the Company and its shareholders. As such, we recommend a vote "AGAINST" this Proposal.

 

 

 

 

 

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