Analysts PraiseTarget Credit Card Deal with JPMorgan

Target Corp.’s (TGT) deal to sell nearly half of its credit card receivables to JPMorgan Chase & Co. (JPM) for $3.6-billion may have been less than the retailer had originally hoped for as the credit crunch has made these types of portfolios less attractive, but investors like William Ackman of the hedge fund Pershing Square, who have been pressuring Target to make such a move, should be pleased by news that the money will go to capital investments and share repurchases. The receivables are being sold at a 7% discount.

While the deal provides Target with liquidity without accessing term debt markets this year, the remainder of its credit portfolio continues to expose the company to weak credit conditions, said Citigroup analyst Deborah Weinswig.

Goldman Sachs analyst Adrianne Shapiro told clients:

Target weighed its options and rather than accessing the debt capital markets, it opted to satisfy its liquidity needs by selling a portion of the risks and benefits of its credit portfolio.

The cost of using credit to secure the $3.6-billion comes at a cost: $0.03 to $0.04 of earnings per share dilution “as aggregate financing costs are now expected to surpass the costs of variable rate unsecured borrowing,” she said.

However, given the challenging macro backdrop these days, Ms. Shapiro said Target seems to have weighed its options appropriately.

Target will continue to control its financial services strategy and payment of JPMorgan’s invested capital will occur between five and six years after the transaction closing, unless both parties decide to extend the agreement. The companies have agreed to share the expected profits on a pro-rata basis, but those above a variable cap will be retained by Target.

The deal is expected to close by the end of May.