Wachovia Corp. announced an agreement Wednesday to acquire Partners First Holdings, a deal that would close the book on an attempt by midsize credit card banks to pool resources to remain competitive.
Wachovia Bank Card Services of Atlanta said it would pay a premium of about $175 million, or 8.3%, for $1.99 billion of receivables and 1.2 million accounts from Partners First, which is principally owned by Bank of Montreal and its Chicago-based affiliate Harris Bankcorp. The Wachovia unit, which with $6.3 billion of managed loans ranks 12th in the bank card industry, said it would jump to 10th - a symbolically important place in a business increasingly defined by economies of scale - by increasing its card loans 32%.
It said it would keep Partners First's 150 employees and its facilities in Baltimore and Boston and continue to issue cards to Harris customers under that bank's name for at least five years.
This acquisition "fits our strategy of aligning with regional brands like Harris to enhance our credit card business," said Charles M. Hegarty, president of Wachovia Bank Card Services. Baltimore-based Partners First was formed two years ago by the former BankBoston Corp., the Bank of Montreal/ Harris tandem, and First Annapolis Consulting of Linthicum, Md. Their goal was to help banks with modest card portfolios stay in the business by outsourcing portfolio management services.
BankBoston withdrew in conjunction with its merger this year with Fleet Financial Group, a top-10 card issuer. At that time, John R. Soderlund, president and chief executive officer of Partners First, told American Banker that Bank of Montreal was committed to staying with the venture.
Competitive pressures caused a change of heart.
"We realized that unless we were going to put a significant capital injection into Partners First, we weren't going to be one of the big players," said Bank of Montreal spokeswoman Denny Allen. "We thought that money could be better spent somewhere else."
Ms. Allen said Bank of Montreal will allocate those resources to expand electronic commerce, wealth management, and small-business banking.
The Toronto-based bank said it expects to book a $75 million pretax gain when the deal closes in the first quarter.
Partners First was ranked as the 20th-largest MasterCard and Visa issuer in the United States by The Nilson Report, an industry newsletter based in Oxnard, Calif.
David Robertson, president of The Nilson Report, said the sale was not a surprise. "Their portfolio was in decline," he said, adding that third-quarter receivables were down 11%.
More surprising to some was that the agreed-upon premium is about half the 16% average on portfolio transactions this year, as tracked by Robert K. Hammer, an investment banker in Thousand Oaks, Calif., who brokers credit card deals.
Mr. Hammer said the premium was probably lower because Wachovia agreed to take on Partners First's employees and facilities, a provision that is rare in deals of this type.
"Not many buyers are willing to take on employees when they're trying to fill the unused capacity in their own shop," Mr. Hammer said. "For [Wachovia's] purpose it was a fit, but for most buyers it wouldn't have been a fit, and that is what pushes the price down."
Susan L. Roth, an analyst at Donaldson, Lufkin & Jenrette in New York, said Wachovia paid a fair price. "Some of the premiums that have been paid have been too high, and perhaps some of the buyers who have paid too much might be starting to realize that," she said.
Robert S. McCoy Jr., vice chairman and chief financial officer of Wachovia Corp. in Winston-Salem, N.C., said it reviewed many portfolios this year but is a "very disciplined acquirer" and does not pursue growth for its own sake.
"We're very pleased with the quality of this portfolio," Mr. McCoy said. "The credit scores are quite good, and we think it will fit into our credit card strategy quite well."
Mr. Hammer said he was surprised that Wachovia won the bidding over other, larger candidates such as Citigroup Inc., Chase Manhattan Corp., and MBNA Corp.
"This is the first time they've appeared on the radar screen as a buyer of a larger file this year," Mr. Hammer said. "It's telling me their corporate management is allowing them to spread their wings."