🎙️ The New Europe

😎 Keep going with the flo.

Flo, the star of Progressive Insurance commercials, is one of TV’s most recognizable faces thanks to her spirited personality. As shown below, she’s helped boost Progressive’s stock up, up, and away.

Savvy marketing at its finest. Now that’s Progressive.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

• Capital One to buy Discover for $35 billion

• Saudi Arabia’s mega projects

• Walmart dives further into media

All this, and more, in just 5 minutes to read.

Chart of the Day

In The News

🏦 Capital One to Buy Discover Financial for $35 Billion

Two of the largest credit card companies in the U.S. are teaming up. 

Capital One will buy Discover Financial for about $35 billion in an all-stock deal. The move comes at a booming time in the sector, with more consumers moving to cards, away from cash, thanks to rewards programs and digitization. 

Singular opportunity: With its $52 billion market cap, Capital One will benefit from a new network, increasing its power in payments (if regulators sign off on the deal).

Visa and Mastercard are well ahead of Discover, but Discover is one of their few competitors in the U.S. It’s also one of a small number of card issuers that has a payments network, too.

• It’s a “singular opportunity” to bring together two companies that can compete with the largest payment networks, like Visa and Mastercard, Capital One’s CEO said.
  

• Acquiring Discover will give it access to a credit card network of 305 million cardholders, adding to its base of more than 100 million customers.

Capital One, the ninth-largest bank nationwide, uses Visa and Mastercard for most of its cards, but it plans to switch at least some cards to Discover. (Visa and Mastercard maintain a much larger merchant acceptance outside of the U.S.)

Bigger is better: Discover is an online company, so the acquisition doesn’t add to Capital One’s ~750 branches and 2,000 ATMs. But Capital One further benefits from Discover’s cardholders, who tend to have high credit scores and sizable savings accounts, allowing it to keep growing its presence there. 

• As one finance professor notes, “The main rationale is the fixed costs of technology that result in bigger being better. This fact has been reshaping many industries for many years, and I see no reason to think that the trend toward fewer, but larger, firms will end.”
  

Why it matters:

An uptick in credit card debt has also helped big issuers. Though credit card debt fell during the pandemic, it’s rising again. Translation: Big interest charges that cardholders pay to banks. Cha-ching!

More fees! Rising credit card use also adds to the billions in interchange fees banks collect yearly. Card networks set the fees, then merchants pay them when consumers shop at their stores. 

• Capital One’s acquisition makes negotiating interchange fees with merchants easier.

The deal ranks among the biggest in 2024 following a lull in M&A activity last year, thanks to economic uncertainty and higher interest rates. But thus far, deals have jumped 90% in the U.S. compared to last year. Deals are back, baby. 

Read more

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🇸🇦 Saudi Arabia Loves Mega Projects

Yes, your home reno is very impressive and ambitious, but it pales in comparison to what’s going on in Saudi Arabia.

Big things are happening in the kingdom whose Crown Prince has committed to turning the Middle East into “the new Europe.”

From a $48 billion property development featuring a quarter-mile-tall cube, a new global airline, a merger between the PGA Tour and LIV Golf, and over $100 billion of investment in chips and electronics, Saudi Arabia hasn’t hesitated to use its checkbook lately.

• That is to say nothing of its planned mega-city known as The Line, which will be 110 miles long with no cars or streets (some say it’ll take as much as $1 trillion to build and is scheduled for completion by 2030.)
  

• There are also proposals to spend $38 billion on turning the country into an esports and video gaming leader.

For the country’s sovereign wealth fund, tasked with funding these bold initiatives, the bills are adding up — the fund’s cash levels recently dropped to the lowest level in several years.

Why it matters:

Big plans: Saudi Arabia hopes to transform itself from oil dependence to a hub for technology, finance, and luxury spending via its Vision 2030 plan, but making the conversion is costly.

• Wary of further draining its sovereign wealth fund, the kingdom is turning to outside investors for new borrowing and to sell a massive equity stake in the country’s “crown jewel,” the oil giant Saudi Aramco.
  

• As the state injects more capital into the Saudi sovereign wealth fund, its assets under management are expected to balloon from just over $700 billion today to $2 trillion by 2030.

Follow the money: While lower oil prices have weighed on the government’s budget, it’s making up the difference with large debt sales — outside of the U.S., Saudi Arabia has more dollar-denominated bonds (~$100 billion) than anyone else in the world except for the World Bank.

Despite plans to run deficits through 2026, Saudi Arabia isn’t exactly short on financial firepower or swimming in debt.

• Its debt-to-GDP ratio is just 26%, about half of Germany’s and well short of the U.S.’s 120%.

Read more

More Headlines

🌎 Magnificent 7 profits now exceed almost every country worldwide

✈️ American Airlines is raising checked luggage prices, again

🏢 Why it’s so hard for people to find affordable apartments to rent

🇮🇱 Israel’s economy shrinks at nearly 20% annual rate amid war

🧠 Musk says first Neuralink patient can move a computer mouse ‘by just thinking’

📺 Walmart Dives Further Into Media With Vizio

While millions of Americans buy stuff on the cheap at Walmart, Walmart is buying a few things of its own. The retail giant will acquire TV maker Vizio in a $2.3 billion deal.

Although Walmart has sold Vizio TVs for years at its stores, the company sees an opportunity to further embrace the advertising business, tapping into Vizio’s SmartCast Operating System, which allows some 18 million users to stream free ad-supported content.

For Walmart, the media biz offers better profit margins than, say, selling groceries and clothes, and its existing media business, Walmart Connect, grew 22% last quarter.

• Walmart Connect enables brands to purchase “strategic placements” on Walmart’s website & app or through the 170,000 digital TV & point-of-purchase screens in its stores nationwide.

Why it matters:

Meanwhile, nothing spurs action more than seeing a peer (Amazon) get rich. As in many areas, Walmart aims to compete with Amazon. While the ‘Zon has been in the Smart TV business for years, it recently introduced an ad-supported Prime Video tier.

Walmart’s response is to integrate Vizio, which will bring a “scaled, connected TV advertising platform to Walmart Connect.”

• As Walmart’s chief revenue officer put it in corporate lingo, they think Vizio offers “great viewing experiences at attractive price points. We also believe it enables a profitable advertising business that’s rapidly scaling.”
  

• Investors on both sides appear keen on the deal, with Vizio stock moving 15% higher while Walmart’s climbed 3% on Tuesday. Walmart shares have risen about 20% over the past 12 months and 77% over the past five years, roughly in line with the S&P 500.

Read more

Quick Poll

On Friday, we asked: Have you ever been to Wawa?

—Wrote one reader: “I live in Florida. First saw them in Maryland in 2012. Now in Florida, they have ‘sprouted’ up like weeds.” Said another: “I’m from NJ, so duh.”

—Another respondent simply wrote: “Gas and dinner,” while someone else said they visit Wawa every other week. “One of the best economical and good food for what it is. Better than going out for fast food, they’re quick and always have great employees.”

—One reader who said “no,” wrote in: “No, but I’ve been to QuikTrip, and I think it’s the best in the industry.”

See you next time!

That's it for today on We Study Markets!

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