CoreStates Selling $1 Billion In Card Loans to Household

CoreStates Financial Corp. said Friday it would sell half of its $2 billion credit card business to a unit of Household International and an unidentified third party.

The purchase price was not disclosed but is believed to include a premium of $150 million, or 15%, over the value of the receivables. The Philadelphia-based banking company said it would use $76 million of the proceeds to retire goodwill from its balance sheet and would realize an after-tax gain of about $50 million on the sale.

Among Biggest Sales

The deal, under which CoreStates will shed cardholder accounts outside its primary region, is one of the largest card sales ever.

The transaction is also noteworthy for its unusual structure, which observers said would help Household avoid an accounting problem often encountered by acquirers of large credit card businesses. If successful, the structure could make it easier for other companies to swallow big credit card portfolios.

By terms of the transaction, expected to be completed in October, Household Credit Services, Salinas, Calif., will buy $1 billion of card receivables from CoreStates. The third party - a group of nonbank investors - will buy the underlying customer accounts and other "intangible" assets associated with the portfolio.

Evading Burden of Goodwill

Because it will not own the intangibles outright, Household will not have to carry an excessive amount of goodwill on its books, according to people involved in the transaction. Typically, the premium paid for a portfolio is recorded as goodwill and amortized over six to eight years.

Household will lease the accounts from the investors, paying them fees.

"It was a smart move on their part in terms of the accounting that is involved," said Robert K. Hammer, an investment banker in Simi Valley, Calif. "Household and their investment bankers are on the leading edge here, and we are likely to see more deals like it as Wall Street looks for ways to get these credit cards sold."

Investment Bank's Role

Smith Barney, Harris Upham & Co. worked with Household on the deal. An executive at the New York-based investment house said it was too early to discuss details of the transaction.

"It's a unique structure designed to help Household finance normal intangibles," he said.

Household is the nation's 10th-largest bank-card issuer; it has about 3 million Visa and MasterCard accounts. Its receivables total $2.9 billion and will total $3.59 billion with the CoreStates transaction.

Considered a growing credit card powerhouse, Household recently announced a deal with Ameritech, the Chicago-based parent of Illinois Bell, to offer consumers a combination telephone card and credit card.

Package Offered in May

CoreStates originally put the card loans on the block in May, after concluding that it could "focus its marketing dollars more effectively" by targeting consumers in the Middle Atlantic region.

Unlike other recent sellers, the banking company had no plan to leave the card business entirely, nor was it in dire need of capital. When the sale is completed, the banking company will have $900 million in card loans.

CoreStates had planned to cancel the offering if it did not get bids in line with its expectations. But the estimated 15% premium is slightly greater than the norm in recent transactions.

Depressed Price Climate

Rising delinquencies and the shaky financial condition of many potential buyers have depressed prices for card-loan sellers. Big portfolios have been particularly difficult to sell.

Mr. Hammer, the California investment banker, said 17 card portfolios have changed hands this year, at an average gross premium of 13.8%. That compares with an average gross premium of 18.7% in 1990.

CoreStates and its investment banker, Goldman, Sachs & Co., had said they would carve up the $1 billion portfolio into several chunks if it would help them find buyers more readily.

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