Discover Financial stock surges after Capital One strikes $35.3 billion buyout deal

FILE PHOTO: Signage is seen outside a Capital One Bank in Manhattan, New York, U.S., November 12, 2021. REUTERS/Andrew Kelly/File Photo

(Reuters) – Shares of Discover Financial rose 11% before the bell on Tuesday, after consumer bank Capital One Financial said it would buy the credit lender in an all-stock transaction valued at $35.3 billion.

Discover’s stock was last trading at $122.92, compared to Capital One’s per-share offer price of $138.24, and is on course to open at its highest in nearly two years if current gains hold. The rally was also set to add over $3 billion to Discover’s market capitalization.

The deal is the biggest ever in the credit card sector globally, narrowly coming ahead of Bank of America’s $35.19 billion acquisition of MBNA Corp in 2005, according to data from Dealogic.

Analysts struck a cautious tone about the antitrust scrutiny the deal is expected to face.

The combined company will create the number 1 player in the highly concentrated credit card industry, where the top 10 already hold roughly 90% of the market share, adding to increased regulatory scrutiny, analysts at J.P. Morgan said.

“Regulators are likely to pick carefully through this deal given that Capital One and Discover are two of the largest credit card companies in the U.S.,” Susannah Streeter, head of money and markets at Hargreaves Lansdown, told Reuters.

“However, given the vast savings in operational costs expected, with synergies of $1.5 billion expected in 2027, Capital One believes complex regulatory hurdles are worth being navigated to deliver significant returns,” Streeter added.

Capital One’s shares fell 5.7% in premarket hours.

(Reporting by Manya Saini and Niket Nishant in Bengaluru; Editing by Krishna Chandra Eluri)