--Capital One is selling about $7 billion in card loans to
Citigroup
--Capital One is citing differences in strategic goals between
bank and Best Buy
--Citi claims Best Buy is "a premier retail franchise and
high-quality card portfolio"
(Adds analyst comments in eighth and ninth paragraph.)
By Matthias Rieker and Andrew R. Johnson
Capital One Financial Corp. (COF) is selling about $7 billion of
credit-card loans made for retailer Best Buy Co. (BBY) to Citigroup
Inc. (C) at about book value.
With the sale, Capital One is exiting a business relationship
with the struggling retailer less than a year after acquiring the
portfolio as part of its acquisition of HSBC Holdings PLC's (HBC,
HSBA.LN, 0005.HK) U.S. credit-card business. That HSBC deal, which
included a number of private-label and co-branded credit cards such
as General Motors Co. (GM, GMM.U.T), is expected to be a key driver
of Capital One's future growth.
But the relationship with Best Buy apparently wasn't a fit for
Capital One. "There are simply some key differences in our
strategic goals for the partnership," a spokeswoman said Tuesday,
"so we came to a decision that it was best to end the
partnership."
Citi will take over the issuing and managing of Best Buy-branded
cards. The bank said Best Buy is "a premier retail franchise and
high-quality card portfolio," Bill Johnson, chief executive of Citi
Retail Services, said in a press release. It will "significantly
expand our already strong position as a market leader in North
America."
Best Buy spokeswoman Amy von Walter said it was essentially an
administrative change and would be invisible to consumers.
Best Buy, the world's biggest consumer electronics retailer, has
been suffering from shrinking prices and profit margins on once-hot
sellers such as flat-screen television sets, and the company is
facing intense competition from Internet rivals. The retailer is in
the midst of a shakeup led by a new Chief Executive Hubert Joly,
whose initial moves yielded hints of stabilization during the
holidays but haven't yet had the time show if a true turnaround is
at hand.
The sale of the loans and the termination of the Best Buy
partnership with Capital One are expected to be finalized in the
third quarter of this year, the two banks said. The transaction
won't result in any significant gain or loss for Capital One, the
bank said.
Analysts estimate that the return on assets from the Best Buy
card was below 2%, while other card portfolios are estimated to
return as much as 2.5%. Still, Capital One will lose some revenue
from the Best Buy cards at a time when analysts worry about the
bank's growth prospects.
The deal may indicate that Capital One is struggling with its
private-label cards business, Citi analyst Donald Fandetti said.
"Fortunately, we believe most of the premium they paid for the HSBC
portfolio was for the general-purpose cards, not the private-label
platform," he said.
Capital One has shed several card relationships from the HSBC
acquisition, but it hasn't said exactly how many. The Best Buy
portfolio is the largest to be divested, the bank said. Still,
Chief Executive Richard Fairbank told investors at a conference in
Miami last week the HSBC acquisition gave Capital One the scale to
"have a real position in the space," but "we're going to be very
selective."
Some analysts have begun questioning whether Capital One's
recent acquisitions will pay off as planned after the company
released fourth-quarter results that missed analysts' earnings and
revenue estimates on lower net interest income.
The HSBC deal is "performing more or less as we expected,"
departing Capital One Chief Financial Officer Gary Perlin said
during an separate investor conference last week. However, he noted
Capital One ultimately brought on fewer loans from the HSBC deal
than it had anticipated when the deal was announced in 2011,
leaving Capital One with excess capital it had built up in
anticipation of the acquisition.
"It does lead to a situation where we're going to be looking
obviously to try to allocate the capital and right size it for the
business that we have," Mr. Perlin said.
R.K. Hammer, an advisory firm that works on credit-card
portfolio sales, said this month it expects M&A activity in the
card industry to pick up this year, following a strong deal flow
last year.
"In addition to rising deal prices, the most interesting thing
about card market sentiment now is that rising deal flow has for
the first time in a long time cut across all card segments: prime
deals, subprime, private label, and even prepaid card portfolios,"
the company said in a report this month.
Last year $33.1 billion in card-portfolio deals involving 37
portfolios closed, up from $5.3 billion in deals involving 10
portfolios in 2011, according to R.K. Hammer. Capital One's
acquisition of HSBC's portfolio closed last May.
Capital One's shares fell 1.5% in afternoon trading to $53.24.
The stock is down 8.2% so far this year. Citi rose 1.6% to $44.53
and is up 12.6% since the start of the year.
-Joan E. Solsman contributed to this article.
Write to Matthias Rieker at matthias.rieker@dowjones.com
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