What is the exchange ratio and how many new shares will Capital One issue?

Each Discover common share converts into 1.0192 Capital One common shares, with cash paid in lieu of fractional shares. Based on about 250.8 million Discover shares outstanding, Capital One expects to issue approximately 255.7 million new shares. Historical weighted average Capital One basic shares are about 382 million, so the pro forma basic count is about 638 million.

Is the Discover student loan sale required for the merger to close?

No. The filing states that the consummation of the mergers and the other transactions under the merger agreement are not conditioned on the Discover Student Loan Sale. The sale is expected to close in multiple tranches by the end of 2024, subject to customary closing conditions.

Why do the pro forma EPS figures look so much lower than Capital One's reported results?

The pro forma statements include about $5.6 billion in non-recurring allowance for credit losses on acquired non-PCD loans, which is recorded for FY2023. They also include roughly $2.6 billion of annual intangible amortization (about $548 million for Q1 2024) and a much larger share count. These pro forma figures do not reflect expected cost synergies or integration costs, and they are based on preliminary assumptions.

How much goodwill and intangibles will Capital One record, and how could they change?

Preliminary goodwill is about $10.2 billion, with a net pro forma adjustment of about $9.9 billion after eliminating Discover's $255 million of historical goodwill. Identifiable intangibles are estimated at about $10.3 billion, mainly purchased credit card relationships. The filing states that a hypothetical 10% change in Capital One's share price would move preliminary goodwill by about $3.8 billion, and a 10% change in intangible valuations would move intangibles by about $1.0 billion.

What are the main risks and remaining steps before the Transaction closes?

The Transaction still requires regulatory approvals, stockholder approvals from both companies, and satisfaction of other closing conditions. The Form S-4 registration statement, filed April 18, 2024 and amended June 14, 2024, is not yet effective. Risks identified in the filing include integration into Capital One's compliance management program, possible regulatory conditions, increased regulatory scrutiny given the combined size, potential dilution from new shares, and the possibility of higher-than-expected costs or credit losses.

CAPITAL ONE FINANCIAL CORP 8-K SEC Disclosure

01—Abstract

Summary

Summary of the 8-K filed July 24, 2024. Cited figures are marked; the original filing is the authoritative source.

Capital One's July 24, 2024 Form 8-K updates the unaudited pro forma financial information for its pending acquisition of Discover Financial Services, which was announced February 19, 2024.

The Transaction has three steps: a merger of Discover into a Capital One subsidiary, a second-step merger of Discover into Capital One, and a bank merger of Discover Bank into Capital One National Association. Discover shareholders will receive 1.0192 Capital One shares per Discover share, about 255.7 million new Capital One shares in total, with a preliminary purchase consideration of about $38.7 billion^a. The filing also reflects Discover Bank's July 17, 2024 agreement to sell its private student loan portfolio (about $10.1 billion principal as of June 30, 2024, up to about $10.8 billion in cash) to Santiago Holdings, an affiliate of Carlyle and KKR, with Nelnet's Firstmark Services servicing the portfolio.

The student loan sale is not a closing condition for the Transaction. The pro forma figures show a material change in the combined earnings profile. Pro forma Q1 2024 net income is $975 million^b, and pro forma diluted EPS is $1.35, compared with Capital One's standalone Q1 2024 diluted EPS of $3.13.

For FY2023, pro forma net income is $1,043 million^c and pro forma diluted EPS is $1.03, versus Capital One's standalone $11.95. The FY2023 pro forma results include a non-recurring $5.6 billion allowance build for non-PCD loans, along with $2.6 billion of annual intangible amortization. Pro forma total assets are about $654 billion, and pro forma goodwill is about $25.2 billion after the Transaction.

Investors should note that all purchase accounting, fair value marks, and the student loan sale gain (about $381 million^d) are preliminary. The Form S-4 registration statement is not yet effective, and the Transaction remains subject to regulatory, shareholder, and other approvals. The pro forma information excludes expected cost synergies and integration costs.

02—Key points

Key Highlights

Transaction structure: Discover merges into a Capital One subsidiary, then into Capital One, and Discover Bank merges into Capital One National Association. Discover shareholders receive 1.0192 Capital One shares per Discover share.
Estimated purchase consideration is about $38.7 billion, including about $37.7 billion for common stock and $1.1 billion for Discover preferred stock converted into new Capital One preferred stock, based on Capital One's $147.27 share price as of July 19, 2024.
Preliminary goodwill from the mergers is about $10.2 billion. Net of Discover's historical goodwill, the pro forma adjustment is about $9.9 billion. Identifiable intangibles are estimated at about $10.3 billion.
Discover Student Loan Sale: Discover Bank agreed to sell its private student loan portfolio to Santiago Holdings for up to about $10.8 billion, with closings expected by year-end 2024. The Transaction is not conditioned on this sale.
Pro forma earnings are substantially lower than Capital One's standalone results: Q1 2024 pro forma diluted EPS is $1.35 versus $3.13 standalone, and FY2023 pro forma diluted EPS is $1.03 versus $11.95, reflecting the $5.6 billion non-PCD allowance build, intangible amortization, and a larger share count.
Pro forma share count rises to about 639 million diluted shares, from about 383 million for Capital One standalone, due to issuance of about 255.7 million shares to Discover shareholders.
Pro forma allowance for credit losses is about $23.8 billion versus $15.4 billion for Capital One standalone, and pro forma total assets are about $654 billion. The S-4 registration statement is not yet effective, and all purchase accounting estimates remain preliminary.

03—Questions

Frequently Asked Questions

What is the exchange ratio and how many new shares will Capital One issue?
Each Discover common share converts into 1.0192 Capital One common shares, with cash paid in lieu of fractional shares. Based on about 250.8 million Discover shares outstanding, Capital One expects to issue approximately 255.7 million new shares. Historical weighted average Capital One basic shares are about 382 million, so the pro forma basic count is about 638 million.
Is the Discover student loan sale required for the merger to close?
No. The filing states that the consummation of the mergers and the other transactions under the merger agreement are not conditioned on the Discover Student Loan Sale. The sale is expected to close in multiple tranches by the end of 2024, subject to customary closing conditions.
Why do the pro forma EPS figures look so much lower than Capital One's reported results?
The pro forma statements include about $5.6 billion in non-recurring allowance for credit losses on acquired non-PCD loans, which is recorded for FY2023. They also include roughly $2.6 billion of annual intangible amortization (about $548 million for Q1 2024) and a much larger share count. These pro forma figures do not reflect expected cost synergies or integration costs, and they are based on preliminary assumptions.
How much goodwill and intangibles will Capital One record, and how could they change?
Preliminary goodwill is about $10.2 billion, with a net pro forma adjustment of about $9.9 billion after eliminating Discover's $255 million of historical goodwill. Identifiable intangibles are estimated at about $10.3 billion, mainly purchased credit card relationships. The filing states that a hypothetical 10% change in Capital One's share price would move preliminary goodwill by about $3.8 billion, and a 10% change in intangible valuations would move intangibles by about $1.0 billion.
What are the main risks and remaining steps before the Transaction closes?
The Transaction still requires regulatory approvals, stockholder approvals from both companies, and satisfaction of other closing conditions. The Form S-4 registration statement, filed April 18, 2024 and amended June 14, 2024, is not yet effective. Risks identified in the filing include integration into Capital One's compliance management program, possible regulatory conditions, increased regulatory scrutiny given the combined size, potential dilution from new shares, and the possibility of higher-than-expected costs or credit losses.

04—Continue

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