Federated enters credit alliance
Citigroup will operate the retailer’s proprietary and co-branded Visa credit card businesses
-- Home Accents Today, 6/3/2005 9:55:00 AM
Federated Department Stores has entered into a strategic alliance with Citigroup to operate the retailer’s proprietary and co-branded Visa credit card businesses.
Under the terms of the agreement, Citigroup will purchase all receivables of Federated and The May Department Store Company (after its acquisition by Federated) in three separate transactions for an upfront premium of approximately 11.5%. In total, these transactions are expected to produce after-tax proceeds of approximately $4.5 billion.
Federated and Citigroup also have entered into a multi-year agreement that provides for Federated to receive future ongoing payments. These payments will be based on credit (proprietary and Visa) sales and certain other performance metrics of the credit portfolio after the receivables sale is completed. Federated and Citigroup also have agreed to work together on various marketing initiatives designed to accelerate Federated’s same-store sales gains, as well as on initiatives to further enhance credit growth and profitability, particularly as it relates to the co-branded Visa portfolio.
Federated’s Financial, Administrative and Credit Services division, headquartered in suburban Cincinnati, will continue to manage key customer service functions and no job losses are expected as a result of the transactions. No changes are planned to Federated's credit card or loyalty reward programs, and customers should continue to use their cards in the same manner as they do today.
“We are very excited to be joining forces with a leader in the credit card business through this new alliance with Citigroup,” said Terry J. Lundgren, Federated chairman, president and CEO. “We are exceptionally proud of the credit operation at FACS and pleased with the value that has been created in this business as a result of those efforts. We now look forward to working together with Citigroup to continue to enhance our relationship with our very best customers, while also building on our success in the credit business by capitalizing on Citigroup's great expertise and commitment to the credit business.”
The initial closing is subject to regulatory approvals and other customary closing conditions, and is expected to occur by early in Federated's fiscal third quarter. Federated expects to receive approximately $2.3 billion in after-tax proceeds after paying $1.2 billion of outstanding asset-backed securities.
General Electric Capital Corporation currently owns a portion of the receivables generated by Federated’s retail operations. The GECC portfolio, with $1.2 billion in receivables at the end of Federated's fiscal 2004, is expected to be transferred to Citigroup in late April of 2006. At that time, Federated will repurchase the portfolio from GECC and sell it to Citigroup on the same terms as the initial Federated portfolio sale.
Following a successful conclusion of Federated's pending acquisition of The May Department Stores Company, which is expected to be finalized in the third quarter of this fiscal year, Federated anticipates that within 12 months following the May closing it will sell the May credit portfolio, which included $2.2 billion in receivables at yearend 2004, to Citigroup on essentially the same terms as the initial Federated portfolio sale.
The company anticipates using the proceeds from these transactions either to fund the May Co. acquisition or to repay acquisition-related debt, depending on the timing of the closings. Upon elimination of this debt, cash flow from the transactions may be used to repurchase Federated stock.
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