Two of the US’s largest credit card companies are set to merge in a deal to create a giant financial powerhouse worth around US$35 billion.
Capital One Financial Corp (NYSE:COF) has offered to buy Discover Financial Services (NYSE:DFS) in an all-share transaction to form the sixth-largest US bank by assets and a rival to JPMorgan Chase and Citigroup.
Combined, the company will also be number one in the highly concentrated US credit card industry,
Visa and Mastercard dominate the credit card landscape worldwide but getting to a scale where it can compete with these two is one thought behind the deal, said the companies.
"This acquisition adds scale and investment, enabling the Discover network to be more competitive with the largest payments networks".
Discover shareholders will receive 1.0192 Capital One shares for each one they currently hold, representing a 26.6% premium over Friday’s close and giving them 40% of the enlarged company compared to Capital One's 60%.
Cost savings from the merger are predicted at US$2.7 billion, though the make-up of the board and executive responsibilities was not clear.
Analysts also questioned whether the deal would be allowed to proceed given the Biden administration’s stance on mega-mergers within the banking sector.
"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.
Warren Buffet's Berkshire Hathaway is Capital One’s seventh-largest shareholder with a 3.28% stake.
Shares in Discover Financial were up 11% ahead of the opening of trading in the US on Tuesday,