© Reuters. Capital One, Discover Financial in merger talks – report
Investing.com — Capital One Financial (NYSE:) has said it will acquire credit card company Discover Financial Services (NYSE:) in an all-stock, $35 billion deal, marking one of this year’s largest deals and Capital One’s largest deal in its history.
Shares in Capital One dipped in premarket U.S. trading on Tuesday, while Discover shares surged by more than 11%.
Capital One will give Discovery shareholders 1.0192 shares for each share in Discover, representing a per-share value of $139.86, based on Capital One’s Friday close. The deal represents a premium of about 26.6% to Discover’s Friday closing price, and values the credit card firm at $34.97 billion.
Capital One said in a press release that it had entered a definitive agreement with Discover for the deal, confirming recent reports that the two were considering a merger. The news comes with the U.S. stock market closed Monday for President’s Day.
The move is projected to generate $2.7 billion in pre-tax synergies and be more than 15% accretive to Capital One’s non-GAAP EPS by 2027.
“The deal is expected to be accretive to earnings over time […], but near-to-medium term is less certain given lack of color [regarding] pace of cost saves, purchase accounting dynamics, and credit assumptions,” analysts at Evercore ISI said in a note to clients.
After the closing of the deal, Capital One shareholders will hold 60% and Discovery shareholders will own about 40% of the combined entity.
“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 founder, Chairman and CEO Richard Fairbank said.
In January, Discover announced that net income in its fourth quarter dropped 62% and shares are down 2% year-to-date. The company’s provision for credit losses rose by $1.0 billion compared to the previous year, reaching $1.9 billion. This increase was fueled by a $305 million higher reserve build in the current quarter and a $717 million uptick in net charge-offs.
Visa, Mastercard see potential risks from merger
Mizuho analysts said in a note that established credit card players Visa Inc (NYSE:) and Mastercard Inc (NYSE:) faced some risks from the merger.
Capital One is the largest issuer of Visa and Mastercard credit cards in the U.S., and could now begin steering some of its credit card volumes towards Discover’s networks.
Capital One could also potentially leverage Discover’s network to benefit from better interchange rates, Mizuho analysts said.
Additional reporting by Frank DeMatteo
This story originally appeared on Investing
