Advanta to Report $20M Loss and Consider Sale

Advanta Corp., one of the jewels of the credit card industry, may be on the block.

Faced with rising chargeoffs and consumer bankruptcies, the Spring House, Pa.-based card company said Monday it will report a loss of $20 million for the first quarter. Advanta also said it had retained merger- and-acquisition specialist BT Wolfensohn & Co. to help it explore strategic alternatives, including a joint venture or sale.

The news was another jolt to the credit card world, which has been plagued in recent months by slowing growth and rising losses. Advanta, the ninth-largest issuer of bank cards and the third-largest "monoline," has long been viewed as one of the industry's shining stars. (Advanta's announcement hurt other credit card specialists. See page 21.)

The company is known primarily as a sophisticated user of data mining and other marketing techniques to get its cards, which carry a low "teaser" rate, into the hands of consumers. However, in the third quarter of last year it began to experience setbacks.

Earnings growth has slowed as delinquencies and chargeoffs rose while revolving balances on accounts fell.

"The situation could not be worse," said Susan Roth, an analyst at Donaldson, Lufkin & Jenrette. "Loss rates are higher than anticipated, the attrition rates are higher than anticipated, and it's hard to have a lot of confidence in growth prospects."

Advanta also said Monday that its chief operating officer, David A. Brooks, 57, had resigned. The move by Mr. Brooks, who had joined the company only two months ago from Visa U.S.A., added to speculation that Advanta would eventually be sold.

The bank said it expects net losses for the full year 1997 to be between 6.5% and 7.5%. RAM Research Group of Frederick, Md., reports average industry losses are currently at 5.04%.

Advanta's expected first-quarter loss of $20 million equals approximately 44 cents a share and compares to a profit of $41 million for same period last year, or 91 cents a share.

The company stressed that it is exploring all of its options, including sale.

"We have asked Wolfensohn to review all of our opportunities," William Rosoff, vice chairman for Advanta said. "Wolfensohn is acting as an adviser, not particularly related to mergers and acquisitions."

But industry observers said a sale is the most likely outcome. Wolfensohn, a unit of Bankers Trust New York Corp., is known explicitly for its M&A advisory work and has helped companies like Chase Manhattan Corp. and Chemical Banking Corp. hammer out merger agreements.

According to David Berry, an analyst at Keefe, Bruyette & Woods, Dennis Alter, Advanta's chairman, said in a conference call Monday that 'it would be prudent" for Advanta to "examine an affiliation or partnership."

In addition, the company adopted a shareholder rights plan designed to help it set the terms for any future merger or thwart a hostile takeover bid.

Mr. Berry said he expects a sale within months, but it is unlikely a large commercial bank such as Citicorp or Chase Manhattan Corp. would buy Advanta.

Rather a card specialist, such as Household International Inc. or Ford's Associates First Capital Corp., both with extensive experience buying troubled card portfolios, would be the likely candidates, he said.

In addition to its earnings problems, Advanta has been troubled by a lawsuit with Visa and MasterCard over its Rewards Accelerator card. The associations take issue with the rewards program because it is linked to their rival, American Express Co. The program has been held at a standstill pending the litigation.

"This is a company that has been through some challenges before," said Alex W. Pete Hart, Advanta's chief executive. "We came out of it with record earnings and remarkable growth and it is a company that right now I have to describe as very energized."

Advanta, which has $12.4 billion in credit card loans outstanding, recently expanded its line of business to include mortgage lending and automobile insurance.

Advanta said it would "aggressively" reprice segments of its portfolio, raise credit card fees, reduce the introductory period for teaser rates, tighten underwriting standards and collection procedures, and focus on retention marketing programs.

"The writing has been on the wall for the last year regarding chargeoffs, which have not retrenched and don't look they will settle," said Robert McKinley, president of RAM Research. "I wouldn't be surprised to see a merger," he said, but "they want to do it on their own terms."

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