Analysts from Citigroup suggest that despite concerns from the U.S. Department of Justice (DOJ) about the impact on subprime mortgage competition, Capital One's (COF, Financial) $35 billion acquisition of Discover Financial (DFS) is likely to proceed. Both companies saw their stock prices fall initially due to DOJ concerns but rebounded with Discover Financial's stock rising nearly 4% as market sentiment grew optimistic about the deal's completion.
Citigroup analyst Keith Horowitz's team believes that if the DOJ raises issues regarding subprime lending concentration, Capital One is prepared to work with regulators to find a compromise, possibly involving the sale of some of Discover Financial's credit card portfolio while retaining its core network business. The Citigroup team maintains a "buy" rating for Capital One with a target price of $245. As of the latest market close, Capital One's stock was at $168.78.
Capital One remains confident in securing formal approval for the acquisition, asserting that the deal complies with the legal requirements of the Bank Merger Act. This development follows reports of potential lawsuits from states like New York and California to block the acquisition. New York Attorney General Letitia James has been reported to be seeking court permission to issue subpoenas as part of the antitrust review.
Horowitz notes that while the government's role adds uncertainty, the baseline assumption is that the transaction will be completed. The merger aims to integrate two prominent consumer finance brands, potentially surpassing JPMorgan Chase and Citigroup in U.S. credit card loan balances. Capital One seeks to leverage Discover Financial's payment processing network, enhancing its competitive edge and diversifying its business.
