Signet Banking Corp. announced on Wednesday that it will spin off its credit card business - a move that had been widely anticipated by the credit card and investment communities.
At the same time, the Richmond, Va.-based banking company said it will take a $60 million to $70 million charge in the third quarter to cover a restructuring in its remaining "core bank."
Distribution to Shareholders
The card unit, which has $6.6 billion in managed loans, will be divested in two stages. The first involves an initial public offering, expected to be completed by early fall, of a 19.9% interest.
Signet then plans a tax-free distribution of the remaining stock to its shareholders by yearend.
The new company, to be called OakStone Financial Corp., will apply for listing on the New York Stock Exchange. Richard D. Fairbank, currently head of Signet's credit card division, will be OakStone's chairman and chief executive officer.
Signet's share price rose $1.75 Wednesday to close at $39.25. Analysts applauded the spinoff as a way for shareholders to cash in on the spectacular growth of the card unit, which contributes 70% of the company's earnings.
"You get a nice endgame out of the credit card," said Merrill Ross of Wheat First Securities Inc. "Shareholders are clearly benefiting."
But the move also puts enormous pressure on Signet to improve the lagging performance of its retail and commercial activities. The company's 240 branches in Virginia, Maryland, and Washington, D.C., have long been eyed by potential acquirers.
"It's put up or shut up time," said Donaldson, Lufkin & Jenrette's Thomas Brown. "If they don't get the core bank profitability up, then because of their size and attractive franchise, they'll be vulnerable to some company wanting to come in and do it for them."
Signet had previously stated its goal of boosting return on equity in the core bank from the current 8.5% to 16% by the end of 1995.
Signet executives pointed out that accounting rules protect the bank from a pooling-of-interests acquisition - one involving an exchange of stock - for two years following the IPO. The bank could still be acquired in a cash transaction, but this would be extremely difficult given Signet's $10.8 billion-asset size.
"We've been on takeover lists ever since I can remember, so I'm really not too worried about that," said chairman and CEO Robert M. Freeman.
Signet's strategy is to use some credit card techniques to boost some other business lines. It hopes to use intensive research to identify potential customers for student, home equity, mortgage, and installment loans.
Signet said it would take the $60 million to $70 million in pretax charges to cover early retirements, severance payments, and termination of certain data processing services related to the credit card unit.
But executives declined to provide any hard estimates of how much noninterest expense it is cutting.
"Part of the problem here is that we expect to take a fairly significant chunk of the expense out of the company, But at the same time, we're going to be making investments, so the number is going to be a little funny-looking," Mr. Freeman said.
Mr. Freeman also said he was not sure how many employees would take early retirement and how much normal attrition would occur. Signet had 7,977 employees at midyear.
Mr. Freeman said Signet had not yet received all regulatory approvals, including a charter for the credit card bank, but felt the process had moved far enough along to make an announcement. Signet's board approved the decision at its regularly scheduled meeting Tuesday, and a registration statement was filed with the Securities and Exchange Commission for the stock offering.
"The purpose of the IPO is to raise capital for the new card company," Mr. Freeman said. "We will certainly transfer capital, already allocated, from the core bank. But because of the growth of the card, it needed new capital and this was the way to raise it."
The offering, to be underwritten by J.P. Morgan Securities Inc., Goldman Sachs & Co., and Smith Barney Inc., will not be hitting the market at the most opportune time. Growth in the card industry has slowed in recent months due to intense competition.
Signet said its second-quarter growth in receivables was $700 million, $100 million less than in the first quarter.
"My sense is that valuations in the credit card sector may be peaking," said Ms. Ross. the Wheat First analyst. "But if [the IPO] is just past the cusp, it isn't much past."
* Initial public offering in the fall of up to 19.9%
* DIstribution of remaining shares to Signet holders by yearend
* Undenwriters: J.P. Morgan Securities, Goldman Sachs, Smith Barney
* Stock listing: NYSE
THE NEW CARD BANK
Accounts: 4 million
Loans: $6.6 billion
1993 U.S. rank: 13
CEO: Richard D. Faribank