Hudson's Bay Co. is putting its lucrative credit card division up for sale, a move that analysts said was inevitable after rival Sears Canada Inc. fetched an impressive $2.2-billion by unloading its financial business.
The sale of the HBC credit division eventually could pave the way for a major shakeup in the department store sector as the key players look for ways to boost their stagnant businesses, analysts said.
Nevertheless, HBC probably won't generate as much as Sears did for its credit card unit -- perhaps between $500-million and $600-million, they estimated.
HBC will likely focus on ensuring that it continues to receive future annual revenue from the deal, rather than bagging a big amount from the sale itself, they predicted.
The move, in any case, could herald a cost-cutting effort at HBC, similar to the one now being launched at Sears, said David Brodie, retailing analyst at Research Capital Corp.
Late yesterday, HBC said it is considering "strategic alternatives" for its credit card business, including a potential sale.
"The market conditions are such that we believe there is the potential for the company to realize immediate value for our credit business, while maintaining a significant ongoing stream of income from the partnership we would establish with the ultimate buyer," said George Heller, CEO at HBC.
He said HBC could concentrate on its merchandising and leave the credit card operation to another party that could expand its financial services for customers.
HBC, which owns the Bay, Zellers and Home Outfitters, is particularly dependent on profit it makes from the credit card business.
Last year, its core retail division lost money, while the credit unit rang up an operating profit of $162-million -- and HBC's total operating profit was $122-million.
Still, analysts said that HBC could get a good sum from divesting the financial services division -- and still make a deal to generate continuing income from the purchaser for the credit card revenue.
Jerry Zucker, the wealthy South Carolina businessman who is the single largest HBC shareholder, is pleased with the move.
"It's exciting from a shareholder's perspective," said Robert Johnston, vice-president at Mr. Zucker's InterTech Group Inc. "It does have the potential to dramatically increase shareholder value."
Indeed, Sears Canada's shares have soared since the announcement in August that it had sold its credit card business to J.P. Morgan Chase & Co. for $2.2-billion. Of that, $2-billion is to be distributed to shareholders.
In the past, Mr. Zucker has told HBC that its pool of assets, including the credit card unit, was worth substantially more than the stock was trading at, Mr. Johnston said.
On the Toronto Stock Exchange yesterday, HBC shares closed at $12.80, not far from its 52-week low of $12.40. It reached a 52-week high of $15.75 in July amid rumours that the company was searching for a buyer. The announcement was made after the markets closed.
Yesterday, some analysts were concerned about the potential divestiture of HBC's financial services division.
Dominion Bond Rating Service Ltd. placed HBC under review "with negative implications."
The sale may erode HBC's profit, the bond rating agency said in a report. The credit card division was the company's strongest component "as it provided a consistent and reliable source of earnings despite fluctuations in the earnings of the merchandising business," it said.
HBC did not disclose how it would use the proceeds of the sale. It said it would make a decision on a transaction by the first quarter of 2006.
HBC's financial services division posted $1.2-billion in card receivables in 2004, representing about 3.1 million active accounts (roughly 1.7 million Bay and 1.4 million Zellers accounts.)
It has hired Goldman Sachs & Co. and BMO Nesbitt Burns Inc. as financial advisers in the matter.
Mr. Brodie said a sale of the division could eventually trigger bigger moves in the department store industry. Analysts have predicted that both HBC and Sears could be scooped up by a third party, possibly a financial player.
HBC sells cash cow
Hudson's Bay is following the lead of other struggling retailers in selling off its credit card division, its most profitable asset.
$1.2 billion
TOTAL VALUE IF CARD RECEIVABLES AT THE END OF 2004 FOR HBC'S FINANCIAL SERVICES DIVISION
3.1 million
NUMBER OF ACTIVE ACCOUNTS (APPROXIMATELY 1.7 MILLION BAY AND 1.4 MILLION ZELLERS ACCOUNTS)
SALES
$317.1-million: credit card
$2,681.6-million: The Bay
4,301.1-million: Zellers
$7,069.736-million: Total
PROFIT
$161.541-million: Credit card
67.9-million: The Bay
$84.6-million: Zellers
$129.367-million: Total
*EBIT
Note: Total after various charges
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