Target sells almost half its credit receivables

Target Corp. cinched a deal Monday to sell nearly half of its credit card  receivables to New York financial services giant J.P. Morgan Chase & Co. for $3.6 billion.

The deal, announced Monday, gives the Minneapolis-based retailer enough cash to fund construction of new stores and make other capital investments as well as to continue its share repurchase program.

Current and future Target credit card holders won't notice any changes, as the retailer will maintain control of all aspects of its financial services, including customer service and marketing.

Target announced in September it would review options for its credit card portfolio after being pressured by New York hedge fund manager William Ackman, who owns a nearly 10 percent stake in the retailer. He could not be reached for comment.

"We're nothing short of thrilled," said Doug Scovanner, Target's chief financial officer. He added that teaming with a company the size of J.P. Morgan Chase will give Target access to vast resources and skills it will use to improve the remainder of its portfolio.

J.P. Morgan Chase is the nation's second-largest issuer of Visa and MasterCard cards, with $150.5 billion in outstanding loans at the end of 2007. Target ranked No. 10, with $8.1 billion in Visa and MasterCard receivables, according to the Nilson Report, a payment-card trade journal.

Chase is an active buyer of retailers' credit card portfolios and has a reputation for being creative in how it structures deals. The complicated deal has aspects of both a sale and loan. For example, Target will buy back the stake at the end of five years.

In 2006, J.P. Morgan Chase purchased Kohl's Corporation's $1.5 billion credit card portfolio while allowing the department store chain to continue handling all customer service and marketing.

The Target deal calls for Chase to purchase an undivided interest of 47 percent in Target's outstanding receivables. Unlike simply chopping off half its portfolio to sell, the undivided interest means the two companies essentially will operate the receivables together and share in the results together.

Joseph Beaulieu, an analyst with Morningstar in Chicago, said closing the deal at a time when the economy is flirting with recession likely is "a relief" for the retailer.

"Not so much because Target needed the cash, but more because a savvy, interested third party is wiling to take a long-term stake with no recourse," he said.

Target shares rose in after-hours trading by 75 cents, or 1.4 percent, to $53.94. The retailer's shares had closed down 72 cents at the close of the regular trading day.

Target's credit card portfolio remains one of the most profitable of its kind in the country despite growing defaults by its recession-battered customers, who are starting to walk away from their credit card debt.

Should the credit card operations deteriorate, however, J.P. Morgan Chase agreed to take on all layers of risk in the deal. But shifting that risk came at price for Target: The retailer said the transaction would reduce annual earnings per share by 3 to 4 cents per share, or about 1 percent overall.

Target said it expects to write off between 7 and 8 percent of its receivables for the year, with delinquencies representing about 4 percent of that.

While saying that write-offs were an important component of the credit card operation, the revenue gained from finance charges, late fees and gains when the Target Visa gets used elsewhere is "far more than ample" to accommodate losses, Scovanner said.

"Focusing solely on our write-offs, which some seem to do, is like judging the performance of a Target store by focusing on its utilities expense," he said.

J.P. Morgan Chase will fund the deal by using the anticipated income stream from the portfolio's profit. At the end of five years, Target is expected to repay J.P. Morgan Chase its capital investment, depending on the performance of the credit card portfolio.

The deal is expected to close by the end of May.

Jackie Crosby • 612-673-7335