Wall Street analysts endorsed Capital One , and the Club stock bounced Tuesday — one day after a sharp slide on concerns about possible regulatory hurdles to the company’s pending Discover acquisition. The news Citi, KBW, and Jefferies all said they still expect the $35 billion deal to be completed despite a Monday afternoon report from The Capital Forum subscription service, which indicated the Justice Department may challenge it on anticompetitive grounds concerning subprime credit card concentration of the combined company. Shares of Capital One and Discover closed down nearly 4% and 7%, respectively, on Monday. KBW maintained its buy-equivalent rating on Capital One, calling Monday’s market reaction to the report “overblown.” Citi said that if the DOJ is concerned then Capital One will likely find a way to appease regulators. “Our view remains that if the DOJ finds issue with this subprime concentration, COF will work with regulators to find a compromise which could include selling part of the Discover card portfolio but retaining the network, which is the crown jewel of the deal,” the analysts said. Jefferies also speculated on a possible sale of Discover’s subprime portfolio, forecasting a “modest impact to pro forma EPS.” But the analysts said they “still see the deal as very accretive.” A spokesperson for Capital One told CNBC in a statement that the merger meets all legal requirements and remains “well-positioned to gain approval” COF YTD mountain Capital One Financial (COF) year-to-date performance Big picture The news comes amid a legal battle between Capital One and the family business of President Donald Trump . Earlier this month, the Trump Organization filed a lawsuit alleging Capital One violated consumer protection laws by closing the company’s accounts following the Jan. 6, 2021 attack on the U.S. Capitol. For its part, Capital One has said it does not close customer accounts for political reasons. To be sure, the regulatory consideration of the Discover purchase will be a major test of post-election expectations that a Trump administration would favor more mergers and acquisitions than former President Joe Biden ‘s. Bottom line Against this complex backdrop, we agree with Wall Street’s optimism about the Capital One-Discover deal eventually getting approval. Like the analysts, we’re not ruling out remedies if required by regulators. That’s because it doesn’t seem like Capital One CEO Richard Fairbank would let a divestiture of the combined company’s subprime portfolio stand in the way of the deal. “Owning a payment network, that’s the holy grail” for Capital One, said Jeff Marks, director of portfolio analysis for the Investing Club. “That’s what they want most, not necessarily being this huge subprime owner.” The Discover acquisition is a big reason why we initiated a position in Capital One in the first place on March 6 and subsequently made five more small additions since then, including a buy on Friday . If completed, Capital One will own the Discover Global Network, which will decrease the firm’s reliance on industry heavyweights Mastercard and Visa — and, in turn, lower what it pays out in fees. “I think our thesis hinges on this deal being approved,” Marks added. “We certainly thought under a Trump regime, it would be more likely to be approved. That’s why we started to buy the stock down at these lower levels.” (Jim Cramer’s Charitable Trust is long COF. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Screens display the logos and trading information for Capital One Financial and Discover Financial as traders work on the floor at the New York Stock Exchange on Feb. 20, 2024.
Brendan Mcdermid | Reuters
