In the latest round of large banking entities snatching up retail portfolios, Bank One Corp. - itself a central figure in M&A of late - became the proud new owner of Circuit City Stores Inc.'s private label and co-branded credit card operations. Though Bank One originates plenty of general-purpose bank cards, this marks its entrance into the private label sector. By association, it also marks JPMorgan Chase's entrance into the private label credit card arena.

Banc One Capital Markets research analyst Alessandro Pagani said that the Circuit City portfolio is relatively small, but that it opens the door for private label. "Bank One was not present in private label; this will give them a window into that area," he said.

The purchase price of $1.8 billion equals the par amount of receivables in the Circuit City portfolio, including cash reserves. As part of the deal, Bank One will pay Circuit City for new accounts, as well as subsidize Circuit City's incentive financing programs through at least 2011. The transaction is scheduled to close in the second quarter.

Also, BOCM's Pagani added that Circuit City's portfolio is Federal Financial Institutions Examination Council (FFIEC) compliant, meaning delinquencies will not spike upon transfer, due to differing reporting standards.

Barclays Capital director Jeff Salmon agrees that the asking price was small, describing the transaction's size as a "rounding error" in relation to the massive credit card portfolios of both Bank One and Chase. "More significant is the trend this sets," Salmon said. "The industry is ripe for further consolidation."

Potential targets going forward are Neiman Marcus Group Credit Card Master Trust, Nordstrom Credit Master Trust and Saks Credit Card Master Trust, at the high end of the spectrum. Other department store portfolios currently operated by Federated Department Stores and Target Inc., as well as clothier Charming Shoppes Inc., are also potential targets.

As retailers search for hidden profits, they may seek to shed non-core holdings to create shareholder value. Also, large financial institutions, with higher credit ratings, are in a more advantageous position than retailers to offer credit card services.

"Bank One has access to funds at cost that are very different than ours," Circuit City CFO Michael Foss told analysts during a conference call last week. Foss added that the planned merger with JP Morgan Chase would have no impact on his company's agreement with Bank One.

The private label portfolio generated $27 million in pretax income in fiscal 2003 and is on course to generate a similar level in 2004. Bank One plans to retain 700 Circuit City employees and take over office leases in Atlanta and Richmond, Va., helping offset Circuit City's expected losses by roughly $4.2 million. The company had originally estimated its after-tax loss at $10 million.

The development follows Circuit City's $1.5 billion sale of bank card issuer First North America National Bank to FleetBoston Financial in October (see ASR 10/27/03). Now, after ridding itself of the volatility accompanying the credit business, the company can refocus its energies on correcting its less-than-stellar performance in consumer electronics.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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