Discover Shares Rise On Unsubstantiated Takeover Chatter

10th Jun 2010 20:52

By David Benoit and Brendan Conway Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Discover Financial Services (DFS) was among the top gainers in a buoyant Standard & Poor's 500 Thursday, outpacing the broader index as speculation swirled of a possible takeover, though there appeared to be little factual basis behind the reports. The volume of trading in the credit-card company was higher than average as the stock rose 8% to $13.57 in recent action. Peers Visa Inc. (V), MasterCard Inc. (MA) and Capital One Financial Corp. (COF) each rose around 5%, all on less than half of typical volume. A Discover representative declined to comment. Sterne Agee analyst Henry Coffey said the rumors circulating centered on Barclays PLC (BCS, BCS.LN), and while he didn't know if it was probable or not, he said if a deal were to happen, it would likely be a larger scale bank that would want to own a credit card network that is strong like Discover. But while Coffey wasn't sure of a takeover, he said he thinks the stock is undervalued anyway and could be worth $19 a share. "You are paying a significant undervalued price," Coffey said. "So if it takes a third-party acquisition to unlock the true value, so be it." A representative from Barclays couldn't immediately be reached for comment. Another analyst who asked not to be named said it wasn't impossible that foreign companies could have an interest in acquiring a U.S. credit card operation. There are big hurdles to any takeover of a company such as Discover. Its market capitalization was above $7.3 billion after Thursday's stock rise, a hefty price tag for any potential buyer. Moreover, Discover's ownership is spread among many large companies. Fund giant Fidelity Investments is the largest stakeholder, according to FactSet Research, with about a 9.4% stake. The next biggest is fellow fund giant Vanguard Group Inc. with just under 5%. As the rumors swirled, options traders also appeared to be getting in position for an upside in Discover's shares. The activity mostly reflected smaller retail trading. Early in the session, a few big institutional buyers moved the company's near-term June $13 call options, said Joe Kinahan, chief derivatives strategist at TD Ameritrade. The retail traders followed. "This was a lot of smaller orders, much of it speculative," he said. By mid-afternoon, trading had risen to more than 60 times the open interest in the June $13 contracts. At a premium of 75 cents, the calls make money if shares in Discover top $13.75 before June 18. Retail traders also gravitated to bullish July $15 Discover calls that make money if the stock moves above $15.30 by mid-July. Among those noting the unsubstantiated takeover chatter Thursday was Susquehanna Financial Group LLC, which mentioned the day's heady Discover trading in a daily report on significant stock and options movements. The rumor was also seen on various other Internet sites including message boards, which can be known for perpetrating rumors. -By David Benoit and Brendan Conway, Dow Jones Newswires; 212-416-2458; [email protected]; (Aparajita Saha-Bubna contributed to this report.) (END) Dow Jones Newswires June 10, 2010 15:52 ET (19:52 GMT)