NEW YORK/WASHINGTON — Capital One, a US consumer lender backed by Warren Buffett, said on Monday that it should acquire bank card issuer Discover Financial Services in an all-stock transaction valued at $35.3 billion.
The tie-up, which can mix two of the biggest US bank card firms, goals at constructing “a payments network that may compete with the biggest payments networks and payments firms,” Richard Fairbank, chairman and CEO of Capital One, said in a press release.
Visa, Mastercard, and American Express are amongst other US-based payments networks.
Discover shareholders will receive 1.0192 Capital One share for every Discover share. It represents a 26.6% premium over Discover’s closing price on Friday.
When concluded, Capital One shareholders will own 60% of the combined company, while Discover shareholders will own roughly 40%, in keeping with the statement.
Capital One, valued at $52.2 billion, is the fourth largest player within the US bank card market by volume as of 2022, in keeping with Nilson, while Discover is the sixth.
HIGHER SCRUTINY
The deal is anticipated to be approved by regulators late 2024 or early 2025, Capital One said.
The transaction is prone to experience intense scrutiny as Democratic President Joe Biden’s administration continues to give attention to boosting competition in all areas of the economy, including a 2021 executive order geared toward bank deals.
Capital One, a US consumer lender backed by Warren Buffett, said on Monday that it should acquire bank card issuer Discover Financial Services. Getty Images
“I predict that this deal, if it materializes, will provoke a major push-back and receive heightened regulatory scrutiny,” Jeremy Kress, a University of Michigan professor of business law who previously worked on bank merger oversight on the Federal Reserve, wrote in an email to Reuters.
“It should be the primary big test of bank merger regulation because the Biden administration’s executive order on promoting competition in 2021.”
Democratic progressives have long fought bank consolidation, arguing it increases systemic risk and hurts consumers by reducing lending, and have stepped up pressure on regulators to take a tougher stance on deals.
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The pressure intensified following deals geared toward rescuing failed lenders last yr, including JPMorgan’s JPM.N purchase of First Republic Bank.
The Biden administrations’ executive order required bank regulators and the Justice Department to review their bank merger policies.
The DOJ subsequently said it will consider a broader range of things when assessing bank mergers for antitrust issues, while the Office of the Comptroller of the Currency last month proposed scrapping its fast-track review process.
Capital One, valued at $52.2 billion, is the fourth largest player within the US bank card market by volume as of 2022. Getty Images
By assets, Discover was the twenty seventh largest US bank with nearly $150 billion in assets, in keeping with December Federal Reserve data rating insured US banks, while Capital One was the ninth-largest with $476 billion in assets.
The combined entity could be the sixth-largest US bank, the Fed data shows.
While the pair overlap in some areas of the bank card business, Discover is one in every of the 4 major US bank card processors, together with Visa, Mastercard and American Express, which facilitate bank card payments, a potentially precious source of fees for Capital One.
The deal also would come at time of increased regulatory give attention to bank card fees, that are the topic of strict latest rules proposed by the Consumer Financial Protection Bureau.
That agency, led by merger skeptic Rohit Chopra, who has a say in bank deals, last week flagged competition concerns within the US bank card market.
In a report, it noted that in the course of the first half of 2023 small banks and credit unions tended to supply cheaper rates of interest than the biggest 25 bank card firms across all credit rating tiers.
A previous CFPB report also found that the highest 10 issuers by average bank card outstandings represented 83% of bank card loans in 2022, continuing a decline from 87% in 2016.
SUPERVISORY ISSUES
In late 2023, Discover said it was exploring the sale of its student loan business and would stop accepting latest student loan applications in February.
The corporate, led by TD Bank Group veteran Michael Rhodes, has faced some regulatory challenges.
Discover shareholders will receive 1.0192 Capital One share for every Discover share. It represents a 26.6% premium over Discover’s closing price on Friday. Getty Images
It disclosed in July a regulatory review over some incorrectly classified bank card accounts from mid-2007.
In October, Discover said it agreed to enhance its consumer compliance and related corporate governance as a part of a consent order with the Federal Deposit Insurance Corp.
While supervisory issues are generally an obstacle for deals between financial firms, regulators are more amenable when the issues are with the goal company and the acquirer is taken into account an excellent actor, in keeping with legal experts.
Discover and Capital One reported 62% and 43% falls, respectively, in fourth-quarter profit, as banks increased provisions for losses from bad loans as rising rates of interest raised the chance of consumer defaults on bank card debt and mortgages.
