(By Balaseshan) Retailer Target Corp. (NYSE: TGT) said it has agreed to sell its entire $5.9 billion consumer credit card portfolio to TD Bank Group (NYSE: TD) after nearly two years from its intention to sell the business.
The portfolio will be sold for an amount equal to the gross value of the outstanding receivables at the time of closing. In addition, the two companies entered into a seven-year program agreement under which TD will underwrite, fund and own future Target Credit Card and Target Visa receivables in the United States.
Under the program agreement, which applies to Target's U.S. credit card operations, TD will control risk management policies and regulatory compliance and Target will continue to perform account servicing functions. Target will maintain the current deep integration between its financial services operations and its retail operations.
Target expects its third quarter 2012 GAAP earnings per share will reflect a pre-tax gain of about $150 million due to a change in the accounting treatment of its receivables from "held for investment" to "held for sale". In addition, at closing Target expects to recognize an additional pre-tax gain of $350 to $450 million on the sale of its portfolio.
Target expects to deploy proceeds from the sale in a manner that will preserve its strong investment-grade credit ratings. Specifically, the company expects to apply about 90% of net transaction proceeds to reduce the company's net debt position, with the remainder applied to share repurchase over time.
Target expects that net income from this profit-sharing arrangement, combined with the benefit of debt reduction and share repurchase resulting from deployment of proceeds from the sale, will result in mild dilution to Target's adjusted earnings per share in the first 12 months following closing.
Specifically, Target expects that in the 12 months following closing its adjusted earnings per share will be about 10 cents lower compared with a scenario in which Target continued to fund its portfolio.
Based on its forecast for income from profit sharing combined with the expected benefit from share repurchase and interest savings, Target expects that the adjusted EPS impact of this transaction will be neutral over time.
This transaction, which is subject to regulatory approval and other customary closing conditions, is expected to close in the first half of calendar 2013.
TGT is trading down 0.29% at $62.03 on Tuesday, while TD trades down 1.14% at $82.59.