Target to sell half of credit portfolio

Target Corp. said Wednesday that it is negotiating with an unnamed "investment partner" to sell about half of its credit-card receivables for $4 billion.

Reportedly under pressure from activist investor William Ackman of Pershing Square Capital Management, which owns 9.6 percent of Target stock, the Minneapolis-based discount retailer announced in September that it would put out bids for its receivables.

Since then, the credit environment has tanked. Banks have tightened lending while consumers face foreclosures, falling home values, rising unemployment and higher prices on everything from food to fuel. And Target's credit-card portfolio also has been deteriorating, with delinquencies rising and defaults on the upswing. Target officials have forecast that write-offs from unpaid debt could reach 7 percent in 2008, up from 6.4 percent in 2007.

Target did not release details about how the parties would split the receivables, so it's difficult to say how much value a potential buyer sees in the $8.7 billion portfolio. But some analysts see the announcement, made weeks before Target's self-imposed deadline of March 31, as a move to reassure nervous investors that the retailer has a worthy suitor.

"If they're making this announcement, they're fairly far into the process," said Patricia Edwards, a retail analyst with Wentworth Hauser & Violich in Seattle, Ore. "They're going to try to get a deal done, which will make Wall Street happy."

Edwards added that Target has "a high-quality portfolio and there are some firms out there that haven't been tainted by scandals in the subprime mess ... that have the cash and have the ability to make deals happen."

Target stock, which closed at $51.09, was up about 2 percent in after-hours trading. The stock traded at more than $70 as recently as July.

"Maybe they're hedging and selling half now and half later, when there's less of a mess in the credit markets," said Howard Davidowitz of Davidowitz & Associates, a national retail consulting and investment banking firm in New York City. "You're in an environment where you may not have a lot of people who'll want this stuff. It's an intelligent approach."

Target said in a release that it would be forging a long-term relationship with the potential investment partner "whose broad experience ... would result in strategic and financial benefits" to the company over time.

In recent years, a number of retailers have spun off all or part of their credit-card operations, a move that Wall Street generally has rewarded. While the credit business can be highly profitable -- Target's credit operation drove 80 percent of its pretax profit growth in 2007 -- skittish retail investors see a downside, particularly as debt-soaked consumers stop paying off their bills.

Target is among the last of the major retailers to hold onto its credit-card operations. Sears, Roebuck & Co. sold its portfolio to Citigroup for $3 billion in 2003, the largest sale to date. Circuit City, Kohl's and Macy's also have unloaded their credit-card operations.

Target said it would maintain control of all other aspects of its credit-card operation, including screening and servicing its credit-card customers.