Target Corp (TGT.N) agreed to sell its credit card portfolio to Toronto-Dominion Bank (TD.TO)(TD.N), nearly two years after the U.S. discount retailer said it wanted to unload the business.
TD will pay an amount equal to the gross value of the outstanding receivables - most recently valued at $5.9 billion - when the deal closes, and signed a 7-year agreement to be the exclusive issuer of Target-branded Visa and private-label cards in the United States.
The deal gives Toronto-based TD, the sixth-largest bank in North America, a way to expand its credit card portfolio and allows Target to cut debt as it expands retail operations, including its first foray into Canada, planned for early next year.
Target's credit card business has been growing as the chain offers 5 percent discounts for users of the so-called REDcard and free shipping for online orders.
In the second quarter, the percentage of sales in Target stores paid with Target's REDcard credit and debit cards rose to 12.8 percent from 8.7 percent a year earlier.
"This is a pretty high-quality portfolio," said Tom Lewandowski, a St. Louis-based banking analyst at Edward Jones.
Canada's banks escaped the 2008 financial crisis in relatively strong shape and have been seeking foreign-owned assets to offset meager growth prospects in their home market.
Separately, TD's larger rival Royal Bank of Canada (RY.TO) said on Tuesday it agreed to buy the Canadian auto finance and deposit arm of Ally Financial was also involved in the bidding for Ally, a source told Reuters.
Under terms of the deal, Target, the No. 2 U.S. discounter after Wal-Mart Stores Inc (WMT.N), will keep earning a substantial portion of profits generated by its credit card and Visa portfolios.
Minneapolis-based Target said third-quarter earnings will reflect a pretax gain of about $150 million as it changes the accounting treatment of its receivables from "held for investment" to "held for sale."
It expects to recognize an additional pretax gain of $350 million to $450 million when the deal closes.
The deal, subject to regulatory approval, is expected to be completed during the first half of 2013.
TD shares dropped 1.3 percent at C$81.86, in line with other Toronto-listed financials, while Target added 0.7 percent to $62.66 in New York trading.
ANALYSTS: DEAL FITS TD STRATEGY
TD said in a statement the deal would help achieve an adjusted earnings target of $1.6 billion from its U.S. retail segment in 2013. The unit earned $355 million in the fiscal third quarter.
Analysts said the deal fits the bank's strategy of making small acquisitions to bulk up its 1,300-branch U.S. retail bank and provide an outlet for deposits it has accumulated since entering the U.S. market eight years ago.
"There's not a ton of things to do with those deposits, and so this is very much in keeping with that kind of a strategy," said CIBC World Markets analyst Robert Sedran.
Last year, TD acquired the credit card portfolio of MBNA Canada - one of the largest MasterCard issuers in Canada - from Bank of America Corp (BAC.N).
PROCEEDS TO PAY DOWN DEBT
Target Chief Executive Gregg Steinhafel said last week the company expected to find the right buyer for the credit card business by the end of the year.
The company first said it wanted to sell its receivables portfolio in January 2011, then put the plans on hold in January 2012, saying it would restart talks after paying off financing it had with JP Morgan Chase & Co (JPM.N).
Target plans to use about 90 percent of the proceeds from the deal to reduce its net debt position, and the rest to repurchase its shares over time.
Target said adjusted earnings per share will be about 10 cents lower in the first year after the deal closes than they would have been if Target kept funding the portfolio - due to the combination of the profit-sharing arrangement, debt reduction and share repurchases.
Over time, Target expects that the deal will be neutral to adjusted earnings per share.
(Reporting By Cameron French in Toronto and Jessica Wohl in Chicago; Additional reporting by Euan Rocha; Editing by Gerald E. McCormick,; John Wallace, Kenneth Barry and Jeffrey Benkoe)