The acquisition will create a combined credit card business, with 70 million merchant acceptance points in more than 200 countries and territories, well positioned to compete with the largest payment companies to serve more than 100 million customers
Capital One world headquarters. (Credit: Jmswllms0/Wikipedia)
US-based bank holding company Capital One Financial Corp. (Capital One) will acquire Discover Financial Services (Discover), which owns and operates Discover Bank, in an all-stock deal valued at $35.3bn.
Under the terms of the agreement, Discover shareholders will receive 1.0192 Capital One shares, in exchange for each Discover share held.
The transaction price represents a premium of 26.6% based on Discover’s closing price of $110.49 on 16 February 2024.
The acquisition is expected to be completed in late 2024 or early 2025, subject to certain customary closing conditions, including regulatory and shareholders’ approvals.
Upon closing, Capital One shareholders will own around 60% and Discover shareholders around 40% of the combined company.
Discover will appoint three of its Board members to the Capital One Board of Directors.
Capital One founder, chairman and CEO Richard Fairbank said: “From Capital One’s founding days, we set out to build a payments and banking company powered by modern technology.
“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.
“Through this combination, we’re creating a company that is exceptionally well-positioned to create significant value for consumers, small businesses, merchants, and shareholders as technology continues to transform the payments and banking marketplace.”
The acquisition will create a global payments platform, adding Discover’s 70 million merchant acceptance points in more than 200 countries and territories.
It will position the combined credit card business to compete with the largest payment companies and deliver enhanced value to a franchise of over 100 million customers.
Capital One will be enabled to leverage its customer base, technology, and data ecosystem to enhance sales for merchants and deals for consumers and small businesses.
Also, the acquisition will allow the bank holding company to scale and leverage the benefits of an eleven-year technology transformation across all of Discover’s businesses and the network.
The transaction is expected to generate $2.7bn in pre-tax synergies in 2027, including $1.5bn in expense synergies and $1.2bn in network synergies.
It will also deliver a return on invested capital (ROIC) of 16% in 2027, with an internal rate of return (IRR) of greater than 20%
The acquisition will further strengthen Capital One’s balance sheet, and the combined company would have a CET1 ratio of around 14% at closing, on a pro forma basis.
Centerview Partners served as financial advisors and Wachtell, Lipton, Rosen & Katz as legal advisors to Capital One, on this transaction.
PJT Partners and Morgan Stanley & Co. served as financial advisors and Sullivan & Cromwell served as legal advisors to Discover.
Discover CEO and president Michael Rhodes said: “The transaction with Capital One brings together two strong brands with enhanced ability to accelerate growth and maximises value for our shareholders, enabling them to participate in the tremendous upside of the combined company.
“This agreement underscores the strength of our business and is a testament to the hard work of Discover employees. We look forward to a bright future as part of the Capital One family and to providing expanded opportunities for our loyal customers.”