Is JPMorgan Circling Discover?

NEW YORK (TheStreet) -- JP Morgan( JPM) Chase Card Services Chief Executive Gordon Smith may have been testing the waters when he told Reuters that the bank has not ruled out a purchase of Discover Financial Services( DFS) network, but a deal would be, "very difficult".

"I know Discover was for sale in the market in the past few years," says Carla Zilka, Founder & Principal Advisor, NexGen Advisors. "Based on JP Morgan's strategy this would be the type of deal they would be interested in. "

"A lot of financial services companies are looking to sell right now. I would put Discover in that bucket. I don't think it needs to sell," says Scott Valentin, Managing Director at FBR Capital Markets. "The stocks are undervalued. From JP Morgan's view, if you are a large bank, you could get more profitability. It would make sense."

Discover, which was a spin-off of Morgan Stanley in 2005, has become an attractive card network and has built and international presence through acquiring the Diners Club from Citigroup( C) in April 2008. Discover is the fourth largest U.S. card processing network. Visa(V), Mastercard(MA) and American Express(AXP) are the top three networks in the US.

"It would be a tough deal from the stand point of the [Discover's] management team. They want to do what is right for shareholders, but they may be thinking that just having a credit card lending model will not be sustainable so they could be feeling pressure," Zilka says.

Zilka added that JP Morgan has the scale, good risk management and the platforms to make an acquisition of this kind successful. She also added that JP Morgan was, "impeccable" on timing their deals.

"This is the perfect time to buy because financial services assets are discounted," she says.

Valentin said large banks such as Bank of America(BAC), Citigroup(C)and foreign card issuer China Union Pay might also be interested in pursuing a deal with Discover.

Valentin added that it makes sense for a bank with a large installed customer base to acquire a network because it would bring in additional revenue."There is no asset growth for banks right now. Banks like JP Morgan could use a network to drive credit card profitability," Valentin says. "Discover is in a good financial position so it would come down to price for them."

Their price target for the deal would be $18 or $20 a share, so a it could ring in at around $10 billion, adds Scott Valentin.

--Written by Maria Woehr in New York.

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