business

It's going to take more than a lone hedge fund activist to persuade Target Corp. to unload its highly profitable credit-card unit.

Indeed, two months after the discount retailer hired Goldman Sachs to "review ownership alternatives" for its $7.4 billion in credit-card receivables -- a decision interpreted by many as a reaction to activist hedge fund manager and acquiring Target investor William Ackman -- a growing number of financial experts say Target probably won't sell the portfolio after all.

On Wednesday, a Merrill Lynch analyst said in a research note that a sale is unlikely because prospective buyers may have difficulty finding cash to buy the portfolio. The analyst, Virginia Genereux, gave a credit-card sale a less-than-even chance.

Genereux is not alone. With the credit markets taking a further hit in recent weeks from large losses in mortgage-backed securities, Target may have difficulty finding a financial institution willing to pay a large enough premium to make a sale worthwhile for the retailer, a growing number of analysts say.

"Personally, I don't see a compelling reason for them to sell it," said William Ryan, an analyst with Portales Partners, a New York investment research firm. "And at this point in the credit cycle, I don't think they'll see as good a price as they would hope to get."

Susan Kahn, Target vice president of communications, said that the retailer is reviewing alternatives and that "the outcome includes both a possible sale and a possible keep of our credit-card receivables." A decision will come by the end of the year.

That Target, which had long said it had no interest in selling the credit-card portfolio, would even consider a sale was widely seen as a nod to Ackman, who bought 9.6 percent of Target's shares in July through his New York hedge fund, Pershing Square Capital Management.

Ackman then called on Target to consider ways to boost its stock price.

"From the beginning, I knew they weren't serious," said Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm in New York.

"They had a fiduciary obligation to respond [to Ackman] and look at the portfolio. But they are under no pressure to sell it," Davidowitz said. Ackman, who was reached by e-mail, declined to comment for this story.

If Target doesn't sell, it would likely disappoint some on Wall Street who have long thought that the portfolio exposed the retailer to unnecessary risk. The day after the company announced late Sept. 12 that it was considering a sale, the stock rose 2.7 percent, to $64.42. After Genereux's report Wednesday, it fell 4.7 percent to close at $56.77.

Other large retailers, including Kohl's, J.C. Penney and Macy's, have sold their credit-card portfolios in recent years to generate one-time cash gains and to remove the risk of credit losses from their balance sheets. Target and Nordstrom are among the few retailers still carrying credit portfolios on their books.

Target's net write-offs of uncollectable debt have increased during the past year to 6.52 percent of total credit-card receivables, from 5.88 percent a year ago, according to regulatory filings, though those figures are significantly less than in past years. Still, credit cards have accounted for 12 to 15 percent of the retailer's pretax profit in recent years.

"Right now, Target is damned if they do [sell] and damned if they don't," said Patricia Edwards, a portfolio manager with Wentworth, Hauser and Violich, a Seattle money management firm. "There are some on Wall Street who want them to sell ... and they'll have a tantrum if they don't get it."

Holders of Target's proprietary Redcard spend more, on average, per shopping visit than those without a Target card. "We are in the business of offering credit to our guests in the first place for the major objective of driving sales," Target CFO Doug Scovanner said in a November presentation to analysts.

In September, Target made it clear that it was considering only a sell-off of its receivables, and not the entire credit-card business, Target Financial Services, which issues and services the cards and employs about 2,500 people. To some, this suggested that the retailer had no intention of selling.

"Target has said it doesn't want to sell," Davidowitz said. "At some point, people have to start believing them."

Chris Serres • 612-673-4308