One of Citigroup Inc.'s last actions of the second quarter was the filing of a $15 billion shelf registration, a move that sparked market talk that the company was closing in on a major acquisition.
Closing in it was. In the biggest credit card portfolio deal in years, Citigroup will purchase the entire card program of Sears, Roebuck and Co., the companies said late Tuesday.
Sears, far and away the biggest private-label credit card issuer, had said it would sell all or part of its portfolio, which includes not only $18 billion of private-label card loans but also nearly $12 billion of MasterCard loans. Citi is buying both at a 10% premium, which most analysts said was low, but which still comes to about $32 billion for about $29 billion in total receivables.
Citi will also hire most of the 8,300 employees in Sears' credit and financial products business and take over its operating facilities.
Another key element of the deal will be a wide-ranging continuing relationship between the two companies, described in their statement as a "multiyear marketing and services agreement across a range of each company's businesses, products, and services."
Robert Willumstad, the president of Citigroup and chairman and chief executive officer of its global consumer group, said in a conference call that Citi will become the largest third-party private-label issuer, with $34 billion in receivables, including $7 billion from a recent deal with Home Depot. GE Consumer Finance, which currently holds the top spot, has $27.80 billion in private label loans, according to a June issue of The Nilson Report.
Under the deal, Sears will retain bankrupt accounts and other uncollectable ones, representing nearly $600 million in loans.
Sears has been in the lending business for a long time. It was the birthplace of the Discover card brand and has been a powerhouse in the card business for decades. Sears said the portfolio includes 59 million card accounts, of which 23 million are active.
Citi, meanwhile, which is already the largest Visa/MasterCard credit card issuer, will become the custodian of the venerable Sears Card brand and will become the second-largest issuer of private-label cards. The deal will bring Citi's total card receivables to $169 billion, Citi said.
When Sears announced in March that it was putting its ailing credit business on the block, Alan J. Lacy, Sears' chairman and chief executive officer, said that any deal would involve a "partnership" with the buyer, a prediction that proved true.
Sears expects to receive approximately $200 million in annual performance payments from Citigroup based on new account sign-ups and credit sales generation, the companies said. Citi said that 18% of Sears customers are Hispanic, and that the deal will aid its efforts to court Hispanic customers.
Analysts said Citi got a sweet price but could inherit a mess of a business.
"I think it is a good deal," said David Hendler, an analyst at the New York research firm CreditSights. "They are getting it at a low premium for a huge brand franchise; however, it is a bag of worms. Citi has never been tested in a turnaround situation of this size."
The AT&T Universal Card portfolio that Citi bought five years ago "had problems, but it was not mismanaged like Sears' general purpose MasterCard was," Mr. Hendler said. "Citi is yet again wallpapering over its problems in credit cards."
E. Reilly Tierney of Swiss Reinsurance Group's Fox-Pitt, Kelton Inc., who does not cover either company but does cover the credit card industry, said that a 10% premium is far below the 18% average premium that credit card deals have netted over the last seven years.
For months Wall Street has said the price paid for the Sears book would set a benchmark for future deals, in particular acquisitions of monoline companies such as Providian Financial Corp. "This is not a very bullish premium for credit card valuations," Mr. Tierney said.
Steven Wharton, an analyst for the Loomis, Sayles & Co. asset manager in Boston, said the deal signals that Citi "wants to get bigger and build more scale for private-label."
