MCCLEAN, Va.–A big bet on “boom times” in the credit card business is the primary driver behind Capital One’s plans to buy Discover Financial Services, according to one analysis.
Under terms of the $35-billion, all-stock deal, Discover shareholders are set to receive 1.0192 Capital One shares for each Discover share, representing a premium of about 27% based on Discover’s closing price as of Feb. 16, according to the Wall Street Journal.
After the deal closes, Capital One shareholders will hold roughly 60% of the combined company, with Discover shareholders owning the rest, the report added.
“Capital One is making a big bet at a booming time in the credit-card sector,” the Journal said in its analysis. “More consumers are moving from paying with cash to cards as a result of generous rewards programs and the digitization of commerce—a transition that accelerated with the pandemic.”
The report noted that buying Discover would give Capital One, a credit-card lender with a market value of a little over $52 billion, a network that would “vastly increase its power in the payments ecosystem.”
Desirable Payments Network
“Card networks are critical to enabling transactions and setting fees that merchants pay when consumers shop with credit cards,” the analysis explained. “Though much smaller than Visa and Mastercard, Discover is one of the few competitors to those companies in the U.S. and it is one of a small number of card issuers that also has a payments network.”
According to the Journal, Capital One, the ninth-largest bank in the country and a major credit-card issuer, uses Visa and Mastercard for most of its cards, but plans to switch at least some of its cards to the Discover network, while continuing to use Visa and Mastercard on others.
Capital One also plans to maintain the Discover brand on the cards and network—assuming regulators sign off and the deal is consummated, the report added.
Additional Expansion
“For Capital One, the deal would also further expand the number of cardholders it will count as customers for its credit-card lending business,” the Journal stated. “Many Discover cardholders have high credit scores. Discover also has consumer deposits, most of which are in savings accounts, allowing Capital One to continue to grow its already large presence in that area.”
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