Why Discover Financial Services Shares Are Seeing Blue Skies Tuesday

Discover Financial Services DFS shares are surging Tuesday after it inked a merger deal to be acquired by Capital One Financial Corp COF.

Per the terms, Discover shareholders will receive 1.0192 shares of Capital One for every share they hold, translating to a 26.6% premium over Discover’s last closing price of $110.49 on February 16, 2024.

Post-deal closure, expected in late 2024 or early 2025, Capital One and Discover shareholders will own 60% and 40% of the merged entity, respectively.

Related: Capital One Set To Acquire Discover In Landmark $35.3B Deal

This merger is expected to significantly bolster Capital One’s credit card portfolio and enhance its deposit base, further solidified by acquiring the premium credit card and luxury market platform Velocity Black in the previous year.

The integration of Discover, known for its substantial deposit-gathering capabilities and extensive network, is seen as a strategic move to strengthen Capital One’s market position amid the current economic climate.

Synergies & Accretion: The transaction is expected to generate expense synergies of $1.5 billion in 2027 (26% of Discover operating expenses, plus 10% of Discover marketing expenses).

Also, the companies see network synergies of $1.2 billion in 2027, led by adding Capital One debit purchase volume and selected credit card purchase volume to the Discover network.

The deal is expected to be over 15% accretive to adjusted non-GAAP EPS and generate pre-tax synergies of $2.7 billion in 2027.

Also, the transaction is projected to deliver a return on invested capital of 16% in 2027, with an internal rate of return above 20%.

Apart from this, the acquisition is anticipated to further strengthen Capital One’s balance sheet, with the combined company having a CET1 ratio of approximately 14% at closing and 84% of company deposits insured as of year-end 2023 (on a pro forma basis). 

Price Action: DFS shares are up 11.75% at $123.47 on the last check Tuesday.