Financial services firm Ally Financial Inc. (NYSE: ALLY) announced Wednesday that it has agreed to acquire privately held CardWorks in a cash and stock transaction valued at $2.65 billion. The deal includes approximately $1.35 billion in cash and $1.3 billion in new shares (39.5 million) of Ally common stock.

According to the announcement, the share number is based on Ally’s closing stock price of $32.85 on February 14. The price is based on Ally’s forecast of closing equity and other adjustments, excluding any possible kill-or-fill adjustment. Such an adjustment may arise if Ally’s stock price declines by more than 15%, a kill-or-fill termination right is exercised and Ally elects to fill by issuing additional stock.

The open-ended nature of a kill-or-fill adjustment added to the dilution from the stock portion of the deal itself weighed heavily on Ally’s shares Wednesday morning.

CardWorks founder and CEO, Don M. Berman, owns 70% of CardWorks and will receive a combination of cash and Ally common stock. Berman also will get a seat on Ally’s board and will join the company’s executive management team. All his stock is subject to a lock-up period of one year on all shares. On each of the next three annual anniversaries, Berman may sell up to one-third of his Ally stock, including all unsold shares at the fourth anniversary of the transaction.

Ally CEO Jeffrey J. Brown commented:

CardWorks represents an industry-leading credit card platform in the U.S., and this acquisition serves as an important milestone in Ally’s evolution to be a full-service financial provider for our customers.

Berman added:

At CardWorks, we’ve successfully built a people-centric, compliance-focused organization enabled by technology with a mission to delight our clients and customers, and Ally represents an ideal partner. In leveraging Ally’s commitment to innovation and adaptiveness, the combined company will be well-positioned to meet the financial needs of our ever-growing customer base and deliver sustainable growth and performance.

CardWorks has $4.7 billion in assets and $2.9 billion in deposits and brings to Ally an established credit card platform, full service and recovery operations, and a national merchant acquiring business. The company is a leading provider of non-prime credit cards and consumer lending.

Among the strategic benefits Ally calls out is, “Immediate enhancement of Ally’s revenues and earnings stream through strong portfolio risk-adjusted returns and diversified fee and interchange revenue.” Ally noted that on a pro forma basis, in the 2019 fiscal year, CardWorks would have increased adjusted net revenue by 17% and adjusted pretax income by 18%.

The deal is expected to close in the third quarter of this year, pending regulatory approvals and other closing conditions.

Ally stock traded down more than 11% at $28.39 about half an hour after the opening bell Wednesday. The stock’s 52-week range is $25.80 to $35.42, and the consensus price target on the stock is $39.17. The stock’s dividend yield is 2.31%.

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