Future of Cardless Advanta a Puzzler

What are the prospects for Advanta Corp. now that it has agreed to sell its credit card business to Fleet Financial Group? What is its remaining business worth?

There's really no way to know. Wall Street analysts say Advanta's future, unclear since it hired BT Wolfensohn in March to explore "strategic alternatives," would be if anything even more unreadable after the exit from credit cards-once its primary line of business.

Advanta did an "incredibly" bad job of explaining its deal with Fleet, said David S. Berry, director of research at Keefe, Bruyette & Woods Inc. and formerly one of Advanta's big fans.

Analysts are groping to value Advanta's surviving subprime mortgage, leasing, and corporate credit card operations, which a spokeswoman said are "very profitable."

Also, bondholders wonder whether the A-rated Fleet or recently downgraded BB-rated Advanta would be responsible for Advanta's debt obligations.

"There's a vacuum of fact," said Samuel Liss, analyst at Credit Suisse First Boston.

Investors don't even know just how much Advanta, based in Spring House, Pa., would get from Fleet for its credit card business.

The company said rather vaguely in its press release that the deal "is anticipated to have a total value ... of approximately $1.3 billion, including an after-tax gain of approximately $500 million."

Asked to clarify, Advanta spokeswoman D'Arcy Rudnay said the $1.3 billion includes sales of assets, liabilities, and property to Fleet. A more precise breakdown was not provided "because that's the way we chose to do it," she said.

Fleet officials later said in their conference call with analysts that the company would be paying a 4.4% premium for Advanta's credit card receivables, which are expected to total $11.5 billion when the deal closes this year or in the first quarter.

Perhaps because of their confusion, investors appeared unenthusiastic about Advanta's offer to return capital to shareholders by repurchasing stock at $40 to $45 per share after the Fleet deal closes. After that announcement Advanta shares actually fell, by $2.5625, to $31.875.

Mr. Berry guesses Advanta should trade at or a little above book value, which may be from $21 to $26 a share, depending on estimates of the company's net worth.

All this uncertainty signifies a 180-degree spin in fortunes for a company that was one of Wall Street's darling just last year.

As recently as mid-1996, Advanta logged its 26th consecutive quarter of record earnings; analysts aggressively recommended its stock. The company attracted new customers by the cartload with its no-fee gold card.

But doling out so many cards with big spending limits in a fiercely competitive industry meant offering cards to people who shouldn't have had them.

Credit card analysts say First USA Inc., now part of Banc One Corp., and MBNA Corp. experienced the same problems a year earlier. They responded by pursuing the most creditworthy customers of Advanta and regional banks.

Advanta's attrition and loss rates soared; card customers who stayed tilted toward those whose credit histories precluded their being flooded by competitors' mail solicitations.

Last March the good times ended when Advanta disclosed a $20 million loss and announced the hiring of BT Wolfensohn to advise the company on its future.

People familiar with the situation say Wolfensohn got the job because Advanta vice chairman William Rossoff is a friend of Wolfensohn chief Raymond L. Golden. But the choice struck some as curious, because Wolfensohn, adviser to some of the world's highest-profile corporations, had never before worked for a credit card company.

"This was a tough job, because Wolfensohn's role kept changing all the time," said an investment banker familiar with the situation. "There were lots of questions about what Advanta should do. Sell all the company? Part of the company? Do nothing?"

A variety of would-be buyers checked out the company, and rumor had it this summer that National Australia Bank was close to buying the company. Sources say National Australia made an "indicative" bid but not a firm one.

Some observers said the offer fell through because Advanta's management considered the offer too low, but a source familiar with National Australia's thinking says that was not the case.

"National Australia came to their senses," the source said. "It wasn't like there was a difference of $2. They realized: What does a company in Melbourne need with an American credit card company under siege?"

Although it was not considered a likely buyer until the very end, Fleet, advised by Lehman Brothers and Merrill Lynch & Co., agreed to acquire Advanta's credit card business for what most consider an attractive price.

The sale of Advanta's credit card portfolio would hardly be the last. AT&T Corp., for example, has put its sizable credit card business up for auction, and as the gap widens between big fish and smaller fry, more banks and credit card companies will probably sell out, having decided they lack the resources to compete with the biggest players.

Nevertheless, the deal to sell Advanta's troubled portfolio may go down as one of the last of its kind. Analysts and investment bankers say that while most credit card portfolios up for sale earlier this year were among the messier ones, banks with clean portfolios are now listening to offers from the biggest players. u

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