Capital One to develop Observe in $35.3B all-stock deal: That is what you ought to know

Capital One Financial buying discover Financial Services in an all stock deal it's one of the largest um in the world of Wall Street in a very long time joining us right now is David George be senior research analy good morning to you uh this is a deal that people have talked about as a possibility sort of a a fever dream for a long time uh it is.

Now here I I'm curious upon looking at at just the headline and the deal itself you think this is going to work it's not going to work what's your thought good morning and uh thanks for me Andrew from our perspective we're we're pretty positively disposed towards this deal and like it uh uh quite a lot Consumer Finance and credit card specifically.

Andrew is what we would call a commodity business so scale is increasingly important and Consumer Finance through the cycle is actually a great risk adjusted return business so in addition to significant cost savings there is an opportunity for Capital One to benefit from utilizing discovers backend Network so that if you assume 60 billion in.

Purchase volume which is how much consumers use on Capital One cards and they're able to bring that on to the Discover platform there is about we estimate between a billion and a billion and a half of incremental cost savings that Capital One will be able to benefit so from our standpoint this is a large deal U but the integration risk compared.

To and we've been doing this a long time compared to bank deals is a lot less because in a transactional product like credit card you don't have to worry about retaining Bankers it it there relationship piece is not nearly as meaningful so uh despite this is a being a $35 billion deal a very large one the largest in many years the integration.

Risk here we think is a lot less relative to some of the larger Bank deals we've seen price uh we're looking obviously uh discover is now up uh up about 14 14 bucks you're looking at Capital One down a bit it's all stock so there's an Arbitrage situation going on here yeah the price is a full one one is probably the only buyer that could pay.

This price but um from our perspective it is full but fair uh if you think about kind of the longer term potential at this price um Andrew the earnings accretion going out to 2027 which is really a fully phased in kind of combined company with cost savings and synergies is roughly 14 to 15% AC creative to earning so that's pretty.

Meaningful economic accretion for Capital One shareholders clearly this is a large deal there's some regulatory issues I'm sure that are that you're going to want to talk about but from our standpoint over the intermediate to longer term this is a a pretty good deal okay so let's let's hit the regulatory issues you just mentioned them and and.

You could you could pick your person if you are the treasury Department what do you think this morning if you are Lena Khan uh what do you think this morning if you're the Department of Justice what do you think this morning if you're the Federal Reserve what do you think this morning well I'm just a I'm just an analyst Andrew I am none of those those.

People but I so from our perspective we don't cover discover but they have been dealing with some regulatory issues so this solves a potential regulatory headache so we think that's positive cap one is based in the DC area so clearly we're of the view that they had to have had some at least some preliminary discussions with bank Regulators as well.

As Justice Department officials on this deal but clearly that that's going to be an open question and none of us really know uh but this is there has been a lot of consolidation in card in order to offer uh consumers the best products at the lowest prices in a transactional business like this we we would Advocate approval of a deal like this and we.

Think that it makes sense so David let's flip it around let's say your Visa or your Mastercard or your AMX this morning and maybe we can get those stocks on the board we should probably put a JPM and city as well uh given the underwriting role that they play uh in this world do they look at this and say oh my goodness we have a a new competitor and.

This is going to be a problem do they say oh my God goodness this is fantastic now we can say to actually everybody in Washington who's been coming after us that we're some kind of Monopoly duopoly oh no no look over there we now have new competition yeah it I think from from my perspective there's a couple different angles within that I out cover Visa.

Mastercard my colleague David coning does but um they are largely a Visa issuer so if you assume this volume comes off of that Network and we would expect the international volume to stay on the Legacy players but the domestic volume to come off those rails and come on the Discover rails and that's where that billion to a billion and a half of.

Synergy comes from um in terms of the industry that this is again particularly Chase has has been very aggressive in terms of marketing spend and and investing in again a very transactional and what we think is a commodity business so in order to drive growth you need a competitive advantage in order to take share in cost and marketing skill.

And heft is really one of those advantages so um it's just going to continue to drive increasing competition Andrew in what already is an extremely competitive space today

Sharing is caring!