FleetBoston Financial Corp., the seventh-biggest U.S. bank by assets, agreed yesterday to pay $1.3 billion for Circuit City Stores Inc.'s credit-card business to expand its own card unit, which hasn't grown in at least a year.
FleetBoston is getting Visa and MasterCard credit-card receivables and cash reserves that total about $1.5 billion from Circuit City, the second-largest U.S. electronics chain, the companies said in statement. The sale probably will be completed by the end of the year, they said.
FleetBoston, currently the ninth-largest credit-card issuer, needs to expand its customer base to compete with competitors such as Citigroup Inc. and MBNA Corp., the number-one and number-two card issuers, said David Robertson, publisher of the Nilson Report, a card industry newsletter based in Oxnard, Calif.
"This marks the first time in a long time that it's been in the market to grow its business by way of acquisition. What it's never had before has been unfettered support from senior management," Robertson said. "Just to stay even you've got to be out there buying portfolios when you can."
Citigroup, with a credit-card portfolio worth $92.6 billion, and MBNA, with $80.8 billion, are better able to offer customer incentives and lower rates than smaller issuers, Robertson said.
The purchase will add 2 cents to 3 cents a share in profit in 2004, said Pat Coll, chief executive officer of Fleet Credit Card Services. FleetBoston said last week that revenue at its credit-card business fell 22 percent in the third-quarter to $151 million. Overall profit rose 17 percent as fees from lending and money management grew and bad loans declined.
"There are opportunities to leverage our past experience at managing customer relations and risk management," Coll said. "We'll be able to derive value that Circuit City couldn't or didn't derive."
Circuit City last month said its second-quarter loss widened, partly because of costs related to its bankcard unit. Circuit City spokesman Bill Cimino said the company had lowered the anticipated loss on the sale to $89 million from $105 million previously.
"The sale of the bankcard portfolio will enable us to focus our attention on the revitalization of our Circuit City stores and create a much simpler investment picture for our shareholders," W. Alan McCollough, chairman and chief executive officer of Circuit City, said in a statement.
Circuit City lost $124.2 million in the quarter, as its bankcard business had a pretax loss of $142.3 million, compared with a pretax profit of $12.8 million a year earlier, because of rising customer defaults. The company will incur another $7 million of costs over three quarters for severance and lease termination expenses, Cimino said. That's down from $10 million it previously forecast.
FleetBoston bought the consumer credit-card unit of Advanta Corp. for $532 million in assumed debt in 1998. A Delaware judge ruled in January this year that Advanta should pay $29.4 million to FleetBoston for making it pay too much for the unit.
Sears, Roebuck & Co., the largest U.S. department-store chain, agreed in July to sell its finance division to Citigroup for about $3 billion after being stung by rising delinquencies.
