Discover Devours Diners Club for $165 Million

Updated from 11:45 a.m. EDT

In an effort to go global, Discover Financial Services (DFS Quote - Cramer on DFS - Stock Picks) is purchasing Diners Club international from Citigroup (C Quote - Cramer on C - Stock Picks) for $165 million.

The all-cash deal is expected to close in 90 days and integrations will take at least two to three years. On the conference call Monday morning, Discover CEO David Nelms said he expects $10 million to $15 million in revenue over that time. He attributed the modest near-term increase in incremental revenue to investments made at Diners Club.

Third-party payment volumes are estimated to increase 30% and third-party revenue to increase 60%. The Riverwoods, Ill.-based credit service company will not be a card issuer or lender in the international markets and Citigroup will continue to issue the cards.

"It changes us from a regional network to a global network," Nelms said on the call.

Discover's last foray into the international market, however, ended poorly. The company in March took a $158 million loss from its decision to sell the unit to Barclays for $70 million. It bought Goldfish for $1.4 billion in 2006. The sale is expected to be closed by the end of the second quarter.

Goldman Sachs analyst James Fotheringham, who has a sell rating on the stock and a $14 target price, as recently as Friday seemed to believe a deal was unlikely.

"Though acquisition-at-a-premium is a risk to our recommendation, we believe it is unlikely at this early stage of the consumer credit cycle," he wrote in a note.

After integrating the operations, Diners Club cardholders will be able to use their cards where Discover charge cards are accepted, while Discover card holders will be able to use their cards where Diners Club cards are accepted. Discover will reinvest in the network interoperability and retain the Diners Club brand. They will own the franchisors, not the licensees.

Discover was spun off from Morgan Stanley (MS Quote - Cramer on MS - Stock Picks) last year. The stock is trading up 5.9% to $18.15. According to Thomson Financial, the average price target is roughly $18.

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