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Citigroup to Buy Sears Credit Unit

Retailer to Shift Focus With $3 Billion Sale

By Dina ElBoghdady and Caroline E. Mayer
Washington Post Staff Writers
Wednesday, July 16, 2003; Page E01

Sears, Roebuck and Co. announced plans yesterday to sell its credit card division to Citigroup Inc., the nation's largest credit card issuer, for about $3 billion to focus on the retail side of its business and attempt to recapture the Middle America shoppers it captivated for most of the past century.

The deal, expected to be completed later this year, would close another chapter for Sears, which for decades used the lure of easy store credit to drive sales in its department stores.

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Within the past three years, the retailer has been pushing to cut costs, renovate stores and improve its merchandise. Four months ago, it announced plans to shed the credit card division, which had become a drag on the company's finances and a distraction from its core business.

For Citigroup, the acquisition would further solidify its dominance in the credit card business, giving it more than 100 million active accounts in North America, said industry expert Robert McKinley. Citigroup noted that 60 percent of U.S. households, including a significant chunk of sought-after Hispanic consumers, are Sears customers.

The agreement was announced after the New York Stock Exchange closed. In after-hours trading, Sears shares jumped $6.52, or 19 percent, to $41.50. However, Standard & Poor's Corp. lowered Sears's debt ratings, saying that without the credit card business, Sears would lose an important part of its operating income while relying on a retail business with a "very challenging future." The credit card business generated operating income of about $1.5 billion in 2002, or about 72 percent of Sears' total, factoring in nonrecurring items.

Citigroup shares declined 58 cents, to $46.25, in after-hours trading. Even so, credit card industry experts saw the agreement as a good move for Citigroup. "This clearly is a strong action on the part of Citibank and affirms that it believes the single most important retail credit product is unsecured loans -- that that's where the profits are," said David Robertson, publisher of the Nilson Report, which tracks the consumer credit industry.

During the past three years, Searsaggressively tried to expand its credit card portfolio by converting many Sears credit account holders to Sears Gold MasterCard holders. While the basic Sears card is primarily for Sears purchases, the MasterCard can be used elsewhere and permits balance transfers and cash advances.

Consumers who took advantage of those perks had high default rates, Sears belatedly discovered. So the company needed to raise its bad-debt reserve by $189 million late last year.

Michael J. Silverstein, a senior vice president at Boston Consulting Group, said the sale "allows Sears to monetize an asset that has much more value in someone else's hands."

Under this deal, Citigroup would acquire Sears' credit card portfolio, with receivables valued at about $29 billion, for a 10 percent premium, or about $3 billion. Sears also would keep $3 billion in cash from the portfolio, giving it $6 billion in pretax cash up front.

Sears said it would use the proceeds to retire debt, "return cash to Sears shareholders," and for general corporate purposes. It said it would have approximately $4 billion to $4.5 billion in cash available after the debt repayments.

In addition, Citigroup agreed to pay Sears at least $200 million annually for 10 years for the new accounts and sales on credit that Sears employees are expected to generate. At the same time, Sears said it expects to save $200 million annually as Citigroup takes over the costs associated with Sears' interest-free financing program.

Sears chief executive Alan J. Lacy, who worked in the company's credit and finance units before becoming CEO, described the deal as "a very important milestone."

Under Lacy's tenure, Sears has tried to move away from its traditional everything-under-one-roof approach to better compete against specialty stores and discounters that are siphoning affluent and bargain-hunting customers, respectively.

The "new Sears" is to focus more on the appliances and tools that made it famous, while distancing itself from the "softer side of Sears" strategy launched in 1993.

It scaled back the rollout of the Great Indoors home-remodeling stores. It also dropped certain offerings, such as installed floor coverings, cosmetics, bicycles and custom window treatments. But as some parts of the business were chopped, others grew. Sears rolled out "Tool Territory," a space dedicated to 18,000 tools in 72 brands. Even as Sears cut back on many of its lesser-known apparel brands, it unveiled a brand of classic clothes for women, men and children called Covington, and purchased Lands' End, the catalogue and online clothing retailer.

Searsis even testing a store concept, starting this fall, that would include convenience foods, such as cookies and soda.

© 2003 The Washington Post Company