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Capital One (NYSE:COF) confirmed on Monday that it agreed to acquire Discover Financial Services (NYSE:DFS) in a stock-based deal valued at $35.3B, which will create the largest U.S. credit card company by loan volume.
“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,” said Richard Fairbank, founder, chairman and CEO of Capital One.
Under terms of the deal, each DFS holder will get 1.0192 shares of COF, representing a premium of almost 27% based on Discover’s closing price of $110.49 on Feb. 16, 2024.
Capital One (COF) expects the deal will generate $2.7B in pretax synergies and add more than 15% to its adjusted EPS in 2027. It’s 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 70M merchant acceptance points in more than 200 countries and territories. Still, it’s the smallest of the four U.S.-based global payments networks, which also include American Express (AXP), Visa (V), and Mastercard (MA).
Note 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 related to increased regulatory and risk oversight issues. The company disclosed in its Q2 results a $365M charge related to a misclassification issue. That caused DFS to provide refunds to its merchants and merchant acquirers.
In December, Discover said Michael Rhodes, formerly with TD Bank, would become its CEO as of 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 ~14% at closing, and 84% of the company deposits would be insured as of year-end 2023.
Upon closing of the deal, three Discover (DFS) board members, to 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 Feb. 20 at 8:00 AM ET.