January 13, 2011 / 10:53 PM / 7 years ago

Analysis: Target seeks financing for $6.7 billion of cards

5 Min Read

NEW YORK (Reuters) - Target Corp is putting more of its credit card business up for sale in a way that might attract more buyers, but will also net the retailer less money than selling the whole card operation would.

Target said on Thursday it wanted to sell all of its credit card receivables, which totaled $6.7 billion as of October 30. It sold a 47 percent stake in those loans to JPMorgan Chase & Co in 2008.

But Target is only looking to sell the debts that cardholders owe the retailer and will still keep control of the credit card operations, which are part of a key marketing strategy for the company.

Selling the receivables only "opens up the possibility that they could have nontraditional investors," including fixed-income debt investors such as hedge funds, pension funds and mutual funds, said John Costa, a managing director at Auriemma Consulting Group, who advises on credit card portfolio sales.

Target is one of the few remaining U.S. retailers that sells its store credit cards directly to shoppers, rather than through a bank that owns the credit card business. Millions of Americans use store cards to shop at specific retailers, often to buy large or expensive items.

Last year, Target started offering 5 percent discounts in the United States to shoppers who use its branded credit card and is counting on that offer to help it generate more sales.

Many banks that specialize in store credit cards want to shrink or sell those businesses, which tend to have higher-than-average losses than regular credit cards. Banks including Citigroup Inc and General Electric Co's GE Money have put their store card businesses up for sale since 2007 -- and so far failed to find a buyer.

Target's method could find more success, analysts said, even if it will limit the price it could potentially get for its credit card business.

Credit card portfolios sold at an average premium of 15 percent in 2010, meaning the full business could fetch a price of up to $7.7 billion if the operation were sold with the receivables, according to Robert Hammer, who brokers card portfolio sales as head of R.K. Hammer Investment Bankers.

But if Target is only selling the receivables, "I'd peg it closer to a 6.5 percent premium, at best," or about $7.1 billion, he said.

Target's proceeds will also be reduced by about $4 billion in third-party interests in the receivables, spokesman Eric Hausman said.

Variety of Options

The retailer's 2008 deal with JPMorgan Chase sparked widespread card industry speculation the bank would eventually take over the full portfolio. Target spokesman Eric Hausman said there were a variety of options being discussed and it "remains to be seen" how the company's new plan would affect its relationship with JPMorgan Chase.

Bank spokesman Paul Hartwick declined to comment.

Analysts welcomed Target's decision.

"It's long overdue," Wall Street Strategies analyst Brian Sozzi said.

"The portfolio has been surprisingly stable and I think where markets are right now they're quite receptive, it would be a good time to get out of this," Sozzi said.

Some banks that tried to get rid of their store card businesses during the financial crisis are showing renewed interest in the sector.

Citigroup spokeswoman Elizabeth Fogarty declined to comment on Target, but said in an e-mailed statement the bank is "always looking to partner with premier brand retailers."

The bank put its own $50 billion store card business up for sale in 2009, but has struggled to find a buyer. That portfolio includes credit cards for Macy's Inc, Home Depot Inc and Sears Holdings Corp.

GE Money, which put its store card business up for sale in 2007 and failed to find a buyer, is now "extremely committed" to the store card business, spokesman Stephen White said. He declined to comment on GE's interest in buying new store card portfolios.

Industry analysts also named Capital One Financial Corp as another potential buyer of Target's credit card assets. The McLean, Virginia bank and credit card lender started snapping up store card portfolios last year. It said in August it would take over the Kohls Corp credit card business from JPMorgan Chase and said in November it would buy Canadian retailer Hudson's Bay Co's card business from GE.

Target said on Thursday it would enter the Canadian market by taking over leases for up to 220 Zellers stores owned by Hudson's Bay.

Capital One declined to comment on the Target receivables.

First Annapolis is advising Target on the potential sale.

Reporting by Maria Aspan; additional reporting by Elinor Comlay in New York and Jessica Wohl in Chicago; editing by Andre Grenon

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