alked about for years, Discover Financial Services LLC will finally spin free of parent company Morgan Stanley. The smaller cousin of bankcard brands MasterCard Worldwide and Visa U.S.A., Discover will go public in the third quarter of 2007.

Visa International has said it will also go public, probably in 2008. MasterCard had its initial public offering (IPO) in May 2006.

John J. Mack, Chairman and Chief Executive Officer of Morgan Stanley, said in a conference call with investors Dec. 19 that he'd planned the spinoff a year earlier, but delayed the move during a financially turbulent period for the company because Discover is so profitable.

"When I came here, the firm was really in turmoil, and Discover was one of our best businesses at the time," he said. "With the performance we've put into other businesses, both Morgan Stanley and Discover can go their own paths and create a lot more value for shareholders."

Discover has an estimated market value of $5.2 billion, according to Morgan Stanley. Discover's substantial cash flow should enable it to pay a dividend on its stock after the IPO, said Morgan Stanley Chief Financial Officer David H. Sidwell.

Spin, spin, spin

"Discover had its best ever results this year, while also making substantial progress in executing critical growth initiatives," Mack said. The spinoff "will allow Discover to continue building on its strong brand and significant scale."

It will also give Discover the flexibility to access capital markets directly and use its stock to make acquisitions.

The unit has made progress in growing acceptance of its card brand domestically and has expanded its international presence, Mack said. "It has laid a strong foundation for expanding the payments and debit business. And this is a promising asset, given the market interest in payments companies."

Discover has improved the credit quality of its portfolio, with delinquencies and loan losses at a 10-year low in 2006, he added. Its over-30-day delinquency rate dropped to 3.51% in 2006, from 5.97% in 2003.

On sales volume of $96.6 billion, Discover's pretax income was a record $1.6 billion in 2006, up 72% from the prior year. Net revenues were $4.3 billion.

For the most recent quarter, net revenues were $963 million, down 8% from the previous quarter. Managed merchant, card-member and other fees were $542 million for the quarter, down 6% from the previous quarter as a result of lower sales volume and lower late and over-limit fees.

But fees were up 4% from a year ago, primarily due to higher merchant discount revenues, driven by higher sales, according to the company.

The unit has benefited from overall lower bankruptcy filings in 2006, following bankruptcy law reform in late 2005. Discover made progress in advancing its network strategy, signing merchant acquirer-processor contracts with TSYS Acquiring Solutions, TransFirst and NOVA Information Systems during the fourth quarter.

Taking into account earlier agreements with First Data Corp., Global Payments Inc. and RBS Lynk, Discover now has contracts with merchant acquirers representing a significant portion of bankcard market share as measured by transaction volume.

Discover Network transaction volume was 1.4 billion in 2006. Pulse EFT Association, the No. 3 PIN debit network, handled another 1.9 billion transactions, bringing the total number to 3.3 billion, according to Morgan Stanley.

The Discover Card is accepted at more than 4 million merchant and ATM locations in North America. Discover processed over 3 billion transactions in 2006.

Some 4,200 issuers have put the cards into the hands of more than 50 million consumers. The company lends upward of $45 billion in managed consumer loans.