Capital One to acquire Discover in $35.3B all-stock deal: Here's what you need to know

CNBC Television2024-02-20

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💫 Short Summary

In a significant deal, Capital One Financial is acquiring Discover Financial Services, with potential benefits and competition implications in the credit card industry. The acquisition is seen as positive due to the scale and cost savings, but regulatory approval and the effect on existing players like Visa and Mastercard are open questions. The deal could drive further competition and innovation in an already competitive space.

✨ Highlights

📊 Transcript

✦

Capital One Financial is acquiring Discover Financial Services in an all-stock deal, one of the largest on Wall Street in a long time.

00:00

The deal is viewed positively due to the scale and potential cost savings in the consumer finance and credit card industry.

Utilizing Discover's backend network could result in significant cost savings for Capital One.

The integration risk for a transactional product like credit cards is considered to be less compared to larger bank deals.

The deal is seen as full but fair, with an estimated 14-15% accretion to earnings by 2027.

Regulatory approval and potential consolidation in the credit card industry are important factors for the success of the deal.

✦

The analyst believes that Discover is solving a potential regulatory headache for Capital One.

01:27

Preliminary discussions with bank regulators and Justice Department officials may have taken place.

The analyst advocates for the approval of the deal, citing the benefits of consolidation in the card business.

✦

The acquisition is expected to result in a 14-15% earnings accretion by 2027 and may pose a new competition for existing players in the credit card industry.

02:09

Discover's backend network could bring about significant cost savings for Capital One.

The integration risk for credit cards is lower than for bank deals.

Visa and Mastercard may face new competition as domestic volume could shift from their rails to Discover's.

00:00 Capital One Financial buying discover

00:01 Financial Services in an all stock deal

00:04 it's one of the largest um in the world

00:06 of Wall Street in a very long time

00:07 joining us right now is David George be

00:09 senior research analy good morning to

00:11 you uh this is a deal that people have

00:12 talked about as a possibility sort of a

00:15 a fever dream for a long time uh it is

00:18 now here I I'm curious upon looking at

00:21 at just the headline and the deal itself

00:25 you think this is going to work it's not

00:26 going to work what's your thought good

00:28 morning and uh thanks for me Andrew from

00:30 our perspective we're we're pretty

00:32 positively disposed towards this deal

00:34 and like it uh uh quite a lot Consumer

00:37 Finance and credit card specifically

00:38 Andrew is what we would call a commodity

00:41 business so scale is increasingly

00:43 important and Consumer Finance through

00:45 the cycle is actually a great risk

00:47 adjusted return business so in addition

00:49 to significant cost savings there is an

00:51 opportunity for Capital One to benefit

00:54 from utilizing discovers backend Network

00:57 so that if you assume 60 billion in

00:59 purchase volume which is how much

01:01 consumers use on Capital One cards and

01:03 they're able to bring that on to the

01:05 Discover platform there is about we

01:08 estimate between a billion and a billion

01:10 and a half of incremental cost savings

01:12 that Capital One will be able to benefit

01:14 so from our standpoint this is a large

01:16 deal U but the integration risk compared

01:19 to and we've been doing this a long time

01:21 compared to bank deals is a lot less

01:23 because in a transactional product like

01:25 credit card you don't have to worry

01:27 about retaining Bankers it it there

01:30 relationship piece is not nearly as

01:32 meaningful so uh despite this is a being

01:35 a $35 billion deal a very large one the

01:38 largest in many years the integration

01:40 risk here we think is a lot less

01:42 relative to some of the larger Bank

01:44 deals we've seen price uh we're looking

01:47 obviously uh discover is now up uh up

01:50 about 14 14 bucks you're looking at

01:51 Capital One down a bit it's all stock so

01:54 there's an Arbitrage situation going on

01:57 here yeah the price is a full one one is

02:00 probably the only buyer that could pay

02:02 this price but um from our perspective

02:04 it is full but fair uh if you think

02:07 about kind of the longer term potential

02:09 at this price um Andrew the earnings

02:11 accretion going out to 2027 which is

02:14 really a fully phased in kind of

02:16 combined company with cost savings and

02:18 synergies is roughly 14 to 15% AC

02:21 creative to earning so that's pretty

02:23 meaningful economic accretion for

02:25 Capital One shareholders clearly this is

02:27 a large deal there's some regulatory

02:29 issues I'm sure that are that you're

02:31 going to want to talk about but from our

02:32 standpoint over the intermediate to

02:34 longer term this is a a pretty good deal

02:37 okay so let's let's hit the regulatory

02:39 issues you just mentioned them and and

02:40 you could you could pick your person if

02:43 you are the treasury Department what do

02:44 you think this morning if you are Lena

02:47 Khan uh what do you think this morning

02:49 if you're the Department of Justice what

02:51 do you think this morning if you're the

02:53 Federal Reserve what do you think this

02:55 morning well I'm just a I'm just an

02:57 analyst Andrew I am none of those those

03:00 people but I so from our perspective we

03:02 don't cover discover but they have been

03:04 dealing with some regulatory issues so

03:06 this solves a potential regulatory

03:09 headache so we think that's positive cap

03:11 one is based in the DC area so clearly

03:14 we're of the view that they had to have

03:15 had some at least some preliminary

03:17 discussions with bank Regulators as well

03:19 as Justice Department officials on this

03:21 deal but clearly that that's going to be

03:23 an open question and none of us really

03:24 know uh but this is there has been a lot

03:27 of consolidation in card in order to

03:29 offer uh consumers the best products at

03:32 the lowest prices in a transactional

03:34 business like this we we would Advocate

03:37 approval of a deal like this and we

03:39 think that it makes sense so David let's

03:41 flip it around let's say your Visa or

03:44 your Mastercard or your AMX this morning

03:47 and maybe we can get those stocks on the

03:49 board we should probably put a JPM and

03:51 city as well uh given the underwriting

03:53 role that they play uh in this

03:56 world do they look at this and say oh my

03:59 goodness we have a a new competitor and

04:02 this is going to be a problem do they

04:04 say oh my God goodness this is fantastic

04:06 now we can say to actually everybody in

04:08 Washington who's been coming after us

04:10 that we're some kind of Monopoly duopoly

04:12 oh no no look over there we now have new

04:16 competition yeah it I think from from my

04:19 perspective there's a couple different

04:20 angles within that I out cover Visa

04:22 Mastercard my colleague David coning

04:24 does but um they are largely a Visa

04:27 issuer so if you assume this volume

04:29 comes off of that Network and we would

04:31 expect the international volume to stay

04:33 on the Legacy players but the domestic

04:35 volume to come off those rails and come

04:37 on the Discover rails and that's where

04:39 that billion to a billion and a half of

04:41 synergy comes from um in terms of the

04:43 industry that this is again particularly

04:46 Chase has has been very aggressive in

04:49 terms of marketing spend and and

04:51 investing in again a very transactional

04:54 and what we think is a commodity

04:56 business so in order to drive growth you

04:58 need a competitive advantage in order to

05:00 take share in cost and marketing skill

05:03 and heft is really one of those

05:04 advantages so um it's just going to

05:06 continue to drive increasing competition

05:09 Andrew in what already is an extremely

05:11 competitive space today

💫 FAQs about This YouTube Video

1. What is the potential impact of the Capital One Financial acquisition of Discover Financial Services?

The potential impact of the Capital One Financial acquisition of Discover Financial Services is significant, with the deal being described as one of the largest on Wall Street in a very long time. The acquisition is viewed positively due to the scale and potential cost savings in the consumer finance and credit card industry.

2. How does the acquisition of Discover Financial Services by Capital One Financial benefit the latter?

The acquisition of Discover Financial Services by Capital One Financial is seen as beneficial due to the potential cost savings and the opportunity to utilize Discover's backend network. It is believed that Capital One could benefit from between a billion and a billion and a half of incremental cost savings, and that the integration risk is lower compared to larger bank deals.

3. What are the regulatory implications of the acquisition of Discover Financial Services by Capital One Financial?

The regulatory implications of the acquisition of Discover Financial Services by Capital One Financial are yet to be fully determined. However, it is mentioned that Discover has been dealing with some regulatory issues, and the acquisition could potentially solve a regulatory headache for Capital One. Additionally, preliminary discussions with bank regulators and Justice Department officials may have taken place.

4. How does the acquisition of Discover Financial Services by Capital One Financial affect the credit card industry?

The acquisition of Discover Financial Services by Capital One Financial is expected to have a significant impact on the credit card industry. It could lead to a shift in domestic volume from existing players like Visa and Mastercard to Discover's rails, creating new competition and driving further innovation and growth in the industry.

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