Bank One's Private-Label Test: Circuit City Portfolio

Testing reentry to a business that it vacated more than a year ago, Bank One Corp. announced Tuesday that it will buy at face value the $1.8 billion private-label credit card portfolio of Circuit City Stores Inc.

The Chicago banking company - which in 2002 shed what it called a niche business by selling its stake in a private-label joint venture with GE Capital - plans to take over 1.5 million active Circuit City-branded accounts in the deal, more than half of which are cobranded Visa cards. The Circuit City portfolio would become Bank One's only private-label business.

Bank One is also to acquire the retailer's 700-employee credit facility in Atlanta and a smaller operation in Richmond, Va. The companies expect the deal to close between April and June.

Bank One chief executive officer James Dimon said in a conference call Tuesday that "it has become obvious to us that we need to be in" private-label and "have knowledge about it, because in some cases private-label and cobranding in cards come together. We have to be a little bit more prepared for that. This is kind of our opening foray into that. We think Circuit City will be a great partner."

Bank One's intended merger partner, J.P. Morgan Chase & Co., does not issue private label cards.

William I. Campbell, the chief executive officer of Bank One's card services unit, said in a press release that buying the portfolio would allow his company "to add receivables while efficiently acquiring the expertise and operating systems associated with private-label credit card lending."

It was in June of 2002 that Bank One agreed to sell its share of Monogram Credit Services, a 50/50 business with General Electric Co.'s credit unit with private-label receivables of $3.8 billion. The Kettering, Ohio, venture was founded in December 1998. At the time of the divestiture Bank One said it lacked adequate scale in private-label.

Bank One does have an extensive cobrand business, with partners that include Walt Disney Co., Yahoo Inc., and Starbucks Coffee Co. The 12-year-old Circuit City portfolio it agreed to acquire is 64% Visa-branded. Bill Cimino, a spokesman for the Richmond electronics retailer, said he did not know whether Bank One plans to convert more of the portfolio to cobranded accounts. David Webster, a Bank One spokesman, said his firm will maintain a mix in the portfolio of Visa-branded and store-only cards.

The logic behind the sale, Mr. Cimino said, was simply that "in the end, Bank One can offer more products and services to our cardholders than we could operating it ourselves."

Last year Circuit City ran into trouble with its credit operation after diving into a risky general-purpose card market outside of its customer base. When losses started to top 15%, the retailer announced it would divest the general-purpose portfolio and possibly retain the private-label portion, which carried much lower losses. According to December master trust data, Circuit City charged off 5.4% of its private-label portfolio.

In November the retailer sold the $1.5 billion general-purpose portion, at a discount of roughly 13%, to FleetBoston Financial Corp.'s card services unit in Horsham, Pa. Those accounts do not carry the Circuit City name on them, a Fleet Card Services spokeswoman confirmed Tuesday. Fleet did not acquire any part of the retailer's credit operations.

Circuit City said it expects net cash proceeds of about $355 million from the deal with Bank One and to incur a $10 million charge from it. The retailer said it expects to make about the same amount of money from Bank One as it did as the portfolio's owner: $27 million to $30 million a year pretax.

As part of a seven-year agreement, Bank One is to pay the retailer a commission for each new account and maintain special financing terms for Circuit City customers. The two companies also said they would develop new credit products together, though they gave no specifics about those plans.

During a presentation for analysts Tuesday in Richmond, Circuit City chief executive W. Alan McCollough said the Bank One deal would also mean more cardholder prospects for the retailer, because Bank One could extend credit to customers who are lower on the credit scale.

Chief financial officer Michael E. Foss said at the presentation, "There will be a positive benefit in terms of actually expanding the percentage of customers we would offer financing to."

Mr. McCollough, citing Fleet's deal to merge with Bank of America Corp. and Bank One's deal to merge with J.P. Morgan Chase & Co., said: "In a business where we were big enough for a long time, we view that that is no longer the case."

The private-label business has heated up in the last year with Citigroup Inc. buying the portfolios of Sears, Roebuck and Co. and Home Depot Corp. Citi is now the largest U.S. private-label player, with $29 billion of private-label receivables.

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