Why Capital One plans to purchase Discover in a megamerger of credit score giants

The firms mentioned the transaction is valued simply upward of $35 billion.

“Our acquisition of Discover is a singular opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and payments companies,” Capital One Chief Executive Richard Fairbank mentioned in a launch.

That launch calls out Discover’s “rare and valuable global payments network,” whereas noting that it’s nonetheless the smallest of the 4 U.S.-based networks. “This acquisition adds scale and investment, enabling the Discover network to be more competitive,” the businesses mentioned.

Piper Sandler’s Kevin Barker wrote in a late Monday word to shoppers that the deal would set up the mixed firm as the biggest card issuer as measured by card loans excellent, which he mentioned was $257 billion. JPMorgan Chase & Co.
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has $211 billion, he mentioned.

“In our view, this deal could drive significant value for both shareholders as it significantly increases the scale of [Discover’s] payments platform and effectively reduces the risk of a large reinvestment cycle for [Discover] via integration on the [Capital One] platform,” Barker continued.

At the identical time, he famous that the deal was more likely to face “significant” scrutiny from regulators “given we have not seen a bank merger of this size in several years, excluding forced mergers of failing banks.”

In mild of that anticipated scrutiny and a “fairly long earnback,” he predicted Capital One’s inventory would commerce decrease Tuesday. Capital One mentioned it anticipated the transaction to be greater than 15% accretive to adjusted earnings per share in 2027.

Jefferies analyst John Hecht was extra upbeat concerning the regulatory image.

“Timing and nature of regulatory approval is always a tough guess (esp. in an election year), but from a market share or asset class perspective, we don’t see major headwinds,” he wrote Monday.

Mizuho’s Dan Dolev highlighted {that a} mixture of Capital One and Discover might pose some danger to Visa Inc.
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and Mastercard Inc.
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Capital One “could seek to steer some card volumes to [Discover’s] rails to potentially save on network fees,” he famous previous to the official deal announcement. As it stands, he mentioned that Capital One is the third largest issuer of Visa and Mastercard bank cards within the U.S., representing roughly 10% of home credit score volumes.

He additionally noticed the likelihood that Capital One would look to reap the benefits of Discover’s debit community as a strategy to earn extra interchange, as he famous that almost all of Discover’s debit transactions are exempt from interchange caps set forth by the Durbin modification.