Capital One Financial Corp. plans to buy Discover Financial Services in an all-stock deal that one analyst says would “effectively create the largest card issuer in the United States.”
Capital One COF,
announced the deal late Monday after multiple outlets reported that a transaction was close. Discover DFS,
Shareholders would receive 1.0192 Capital One shares for each Discover share, which would represent a premium of more than 26% to Discover’s Friday close of $110.49.
The companies said the transaction is valued at just over $35 billion.
“Our acquisition of Discover represents a unique opportunity to bring together two highly successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payment networks and companies,” he said at a conference Capital One CEO Richard Fairbank prints. publication.
That statement highlights Discover’s “rare and valuable global payments network,” while noting that it is still the smallest of the four U.S.-based networks. “This acquisition adds scale and investment, allowing the Discover network to be more competitive,” the companies said.
Piper Sandler’s Kevin Barker wrote in a Monday note to clients that the deal would make the combined company the largest card issuer in terms of outstanding card loans, which he said were $257 billion. JPMorgan Chase & Co.JPM,
it has $211 billion, he said.
“In our view, this deal could generate significant value for both shareholders as it will significantly increase the reach of [Discover’s] payments platform and effectively reduces the risk of a large reinvestment cycle [Discover] via integration on [Capital One] platform,” Barker continued.
At the same time, he noted that the deal will likely face “significant” scrutiny from regulators “given that we have not seen a bank merger of this size in several years, excluding forced mergers of failing banks.”
Given that scrutiny and a “fairly long recovery,” he predicted that Capital One shares would trade lower on Tuesday. Capital One said it expects the transaction to be accretive to adjusted earnings per share by more than 15% in 2027.
Jefferies analyst John Hecht said he was more optimistic about the regulatory framework.
“The timing and nature of regulatory approval is always hard to guess (especially in an election year), but from a market share or asset class perspective, we see no major headwinds,” he wrote on Monday.
Mizuho’s Dan Dolev pointed out that a combination of Capital One and Discover could pose some risk for Visa Inc. V,
and Mastercard Inc. MA,
Capital One “may be looking to drive some card volumes towards [Discover’s] rails to potentially save on network fees,” he noted before the deal was officially announced. As it stands now, he said Capital One is the third largest issuer of Visa and Mastercard credit cards in the United States, accounting for approximately 10% of national credit volumes.
He also saw the possibility of Capital One looking to leverage Discover’s debit network as a way to gain more interchange, as he noted that most of Discover’s debit transactions are exempt from the interchange limits established by the Durbin Amendment.