Discover-Home Loan Deal Set to Close

More than a year after the announcement of the agreement, Tree.com Inc. (TREE - Snapshot Report) has finally set a closing date for the sale of almost all the operating and related assets of its subsidiary - Home Loan Center - to Discover Financial Services (DFS - Analyst Report). The transaction is expected to be closed on June 6, 2012, subject to customary closing conditions.

Shareholders of Tree.com have approved the $55.9 million purchase deal, which was initially announced by Discover on May 12, 2011. However, the agreement was amended in February this year in order to modify the payment terms, revise various operating covenants of Home Loan Center to increase its operating flexibility and revise some closing conditions of the transaction.

Consequently, a $20 million deferred portion of the purchase consideration is payable as follows: $3 million on March 7, 2012, $7 million on the first anniversary of the closing date and $10 million on the second anniversary of the closing date. The amount was earlier payable equally on the first and second anniversaries of the closing date. The remaining $35.9 million is payable on the closing date, as agreed in the original agreement.

The acquisition of the operating assets of Home Loan Center will expand Discover's product portfolio by adding a residential mortgage component to its direct-to-consumer banking business. HomeLoan Center originates and processes residential mortgage loans across all 50 U.S. states as well as the District of Columbia.

The deal is expected to have a marginal impact on Discover’s 2012 earnings. The Zacks Consensus Estimate for the company’s second-quarter 2012 earnings is currently pegged at 95 cents per share, downabout 12.7% year over year. For full-year 2012, the Zacks Consensus Estimate stands at $3.99 per share,down 1.7% from 2011.

We maintain a long-term ‘Outperform’ recommendation on the shares of Discover. Currently, the company caries a Zacks #2 Rank, implying a ‘Buy’ rating in the short term.