M & A: Capital One and Discover Financial Unite in a $35B Deal

Capital One (NYSE:COF) is acquiring Discover Financial (NYSE:DFS) in an all-stock deal worth about $35.3 billion. The combination of two large credit card companies is expected to create a payments behemoth catering to over 100 million customers. Interestingly, the move comes at a time when the recent uptick in credit card usage has bolstered the revenue potential within this sector.

The deal is expected to close in late 2024 or early 2025, subject to the fulfillment of customary closing conditions.

Deal Details

Per the agreement, Discover shareholders will receive 1.0192 shares of Capital One stock for each share they currently hold in DFS. The purchase price reflects a premium of about 27%, based on Discover’s closing share price on Friday.

Upon completion of the deal, Capital One shareholders will own nearly 60% of the combined entity, while Discover shareholders will retain the remaining ownership stake.

Financial Benefits of the Deal

The deal is expected to yield expense synergies of $1.5 billion by 2027. Additionally, the acquisition is likely to generate network synergies of $1.2 billion by 2027, due to the inclusion of COF’s debit purchase volume and select credit card purchase volume within the Discover network.

Furthermore, the companies expect the agreement to contribute positively, projecting a more than 15% increase in adjusted earnings per share in 2027. Moreover, the acquisition is expected to generate a return on invested capital of 16% in the same year, along with an internal rate of return exceeding 20%.

Is COF Stock a Good Buy?

Currently, Wall Street analysts are cautiously optimistic about Capital One stock. It has a Moderate Buy consensus rating based on six Buys and 13 Holds. The average COF stock price target of $142.82 implies a 4.07% upside potential. Shares of the company have gained 32.8% over the past six months.

Disclosure