Target to Sell $5.9B Credit Card Portfolio to TD Bank

Target to Sell $5.9B Credit Card Portfolio to TD Bank

Target, which has been seeking a buyer for almost two years, said that it will “continue to earn a substantial portion of the profits” generated by its credit card portfolio.

Target Corporation said Tuesday that it has agreed to sell its entire consumer credit card business to Toronto-based TD Bank Group—news that comes almost two years after the Minneapolis-based retailer announced its intention to sell the business.
Target said that the sale price will be equal to the gross value of the outstanding receivables at the time of closing. Target’s credit card portfolio currently has a gross value of approximately $5.9 billion, and the deal—which is subject to regulatory approval and other customary closing conditions—is expected to close in the first half of 2013.
As part of the deal, Target and TD Bank entered into a seven-year agreement under which TD Bank will underwrite, fund, and own future Target credit card and Target Visa receivables in the United States; it will also control risk-management policies and regulatory compliance. Target, meanwhile, will continue to service credit card accounts—and the company said that it will “continue to earn a substantial portion of the profits” generated by its credit card portfolio.
The deal will not affect Target Red Card credit card holders, who receive a 5 percent discount on purchases.
Target expects its third-quarter earnings per share to reflect a pre-tax gain of roughly $150 million because of a change in the accounting treatment of its receivables from “held to investment” to “held for sale.”
Additionally, at closing, Target expects to recognize an additional pre-tax gain of $350 million to $450 million on the sale of its portfolio. The company said that it expects to apply approximately 90 percent of net proceeds to reduce its debt and the remainder to repurchase shares of its stock over time.
The company also said it expects “mild dilution” to its adjusted earnings per share in the year after the deal closes. Specifically, earnings per share will be about 10 cents lower than they would have been if Target had continued to fund the portfolio. Over time, Target expects the deal will be neutral to adjusted earnings per share.
“This transaction achieves all of Target’s strategic and financial goals for a portfolio sale,” Target Chairman, President, and CEO Gregg Steinhafel said in a prepared statement. “We look forward to working with this premier global financial institution to continue Target’s long history of innovation in our guest-focused financial services strategy.”

Meanwhile, TD Bank Group President and CEO Ed Clark said that the deal with Target will “significantly expand” its presence in the North American credit card business and establish it as a “key player in this space.” According to Reuters, TD Bank owns more than 1,150 retail-banking outlets across Canada and about 1,300 outlets within the United States.
Target announced in January 2011 that it intended to sell its credit card receivables portfolio, then said four months later that it had identified challenges that could hinder or delay a sale. In January of this year, the retailer temporarily suspended its efforts to sell the portfolio, saying that it had determined based on discussions with potential partners that it was “not in its best interests to finalize a transaction” at the time.

Target did, however, say in January that it planned to re-engage in discussions with a limited number of potential partners later in 2012 and believed that a transaction could occur in late 2012 or early 2013—about a year later than originally expected.

Target shares were trading down about 0.2 percent at $62.07 mid-morning Tuesday on news of the sale of its consumer credit card business.
Target is Minnesota’s second-largest public company based on revenue, which totaled $68.5 billion in its fiscal year that ended in January. It operates 1,781 stores in the United States and plans to expand into Canada next year.