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(Reuters) - Bank of Nova Scotia (BNS.TO) (BNS.N) will buy 20 percent of Canadian Tire Corp Ltd's (CTCa.TO) financial services business for C$500 million ($459 million) in cash, the companies said on Thursday.
The bank, Canada's No. 3 lender, will also supply up to C$2.25 billion of credit card receivable financing to Canadian Tire's financial services business.
Credit card receivable financing is a cash advance repaid by withholding a portion of credit card transactions made at the borrower's stores.
As part of the agreement, Canadian Tire has the option of selling up to a further 29 percent of its financial services business to Scotiabank within 10 years.
Canadian Tire, which also reported a drop in first-quarter net profit on Thursday, is best known for its automotive and hardware stores. The company operates nearly 1,700 retail and gasoline outlets.
Its financial services division, which contributed about 10 percent of Canadian Tire's first-quarter revenue, is the eighth-largest credit card issuer in Canada, with 1.8 million active customer accounts and an annual spend volume of C$12 billion.
Scotiabank will fund the acquisition from its own cash resources.
Canadian Tire reported a 3.3 percent drop in first-quarter net profit attributable to shareholders, largely due to a rise in expenses related to advertising during the Winter Olympics, stock-based compensation and the spinoff of its property holdings into a REIT.
Revenue rose 3.8 percent, driven by sales of sportswear at its FGL Sports outlets and of men's work clothes and boots at its Mark's stores. Higher gasoline prices and increased credit card charges also contributed to the rise in revenue.
Canadian Tire also raised its quarterly dividend to 50 Canadian cents from 43.75 Canadian cents.
The company's stock has risen more than 43 percent in the 12 months to Wednesday's close, outperforming the TSX-Toronto Stock Exchange 300 Composite Index .GSPTSE 18 percent increase.
Canadian Tire's shares were up about 1 percent at C$109.25 on the Toronto Stock exchange on Thursday.
($1 = 1.0903 Canadian Dollars)
Reporting by Ashutosh Pandey and Shubhankar Chakravorty in Bangalore; Editing by Don Sebastian