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Capital One (NYSE:COF) confirmed Monday its agreement to acquire Discover Financial Services (NYSE:DFS) in an equity deal worth $35.3 billion that will create the largest credit card company in the United States by lending volume.
“Our acquisition of Discover is a 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,” said Richard Fairbank, founder, president and CEO of Capital One.
Under the terms of the agreement, each DFS holder will receive 1.0192 shares of COF, representing a premium of nearly 27% based on Discover’s closing price of $110.49 on February 16, 2024.
Capital One (COF) expects the deal to generate $2.7 billion in pre-tax synergies and add more than 15% to its adjusted EPS in 2027. It is also expected to deliver a return on invested capital of 16%. % in 2027 with an internal rate of return of more than 20%.
Discover (DFS) has a global payments network with 70 million merchant acceptance points in more than 200 countries and territories. However, it is the smallest of the four US-based global payment networks, which also include American Express (AXP), Visa (V), and Mastercard (MA).
Keep in mind that the transaction comes after Discover hit some turbulence in August 2023, when its then-CEO, Roger Hochschild, left the company. At the time, analysts suspected his exit was linked to larger regulatory and risk oversight issues. The company disclosed in its second-quarter results a $365 million charge related to a misclassification issue. This caused DFS to provide refunds to its merchants and merchant buyers.
In December, Discover said Michael Rhodes, previously at TD Bank, would become its chief executive effective March 6.
The deal is also expected to further strengthen Capital One’s balance sheet. On a pro forma basis, the combined company would have a CET1 ratio of approximately 14% at closing and 84% of the company’s deposits would be insured as of year-end 2023.
Upon closing of the deal, three Discover (DFS) board members, who will be named at a later date, will join the Capital One (COF) board.
The transaction is expected to close in late 2024 or early 2025.
The companies will hold a conference call on February 20 at 8:00 am ET.