Target Nears Credit Card Deal

Updated from 4:42 p.m. EDT

Target(TGT Quote) is in talks with an investment partner to sell half of its credit card receivables business for roughly $4 billion.

The discount retailer, in a statement Wednesday, said the proposed deal with the unnamed firm is still subject to a final agreement and "acceptable economics" at the time of closing. Pending those conditions, the company said a closing during the second calendar quarter "seems possible."

Sources familiar with the situation tell TheStreet.com that Target, via its broker Goldman Sachs (GS Quote), has been in negotiations over the past several weeks with small group of potential buyers that include Citigroup(C Quote) and JPMorgan(JPM Quote).

The sticking point for these firms has been price and terms for a deal that would see Target attempt to retain control of its customer base while also unlocking the cash value of its credit card operation in a swooning market for retailers.

A spokesman for Citi declined to comment on Target's card business. Gordon Smith, CEO of JPMorgan's credit card services division, was traveling and unavailable for comment, according to an assistant in New York.

A spokeswoman at Target declined to comment on any pending transaction or identify the party involved. In its statement, the company touted the advantages of selling only half of the business.

"If completed, [the deal] would generate substantial liquidity for Target from a single source unrelated to the debt capital markets while continuing to utilize the skills and experience of Target's internal team to provide valuable financial products and services to its guests," the company said.

Target, under pressure from shareholder activist Bill Ackman, said in September that it would review options for its credit card portfolio. That announcement came the same day that TheStreet.com first reported Target was aiming to monetize its credit card portfolio while still retaining control of customer relationships.

The retailer's decision on the matter, expected by the end of last year, was delayed as the credit markets tightened and economic conditions worsened.

Indeed, a shaky U.S. economy that has stumbled into a recessionary climate gave pause to the parties interested in striking a deal. In the beginning of the year, both Citi and JPMorgan highlighted in their first-quarter earnings reports that their consumer businesses units, namely those surrounding credit cards and auto loans, were beginning to bow under the strain of a deflating economy.

HSBC (HBC Quote) and General Electric's(GE Quote) GE Money unit also were interested in purchasing Target's credit card operations. A person following Target's discussions, however, says that JPMorgan and Citi have emerged as the top contenders for the coveted portfolio to expand their own credit platform.

During a JPMorgan investor conference on Feb. 27, Smith indicated that his bank was willing to beef their credit card platform, but was not willing to do so at the expense of paying too great a price for Target's portfolio.

The most pressing issue for buyers remains the continued deterioration in credit that has been underscored by the falling values in mortgages of all stripes. Observers are concerned that an unrelenting decline in the economy ultimately will force consumers, even ones with high credit scores, to tighten their purse strings.

These same fears are also hurting Target's retail business, as well as competitors such as Wal-Mart(WMT Quote).

In 2007, Target recorded $1.9 billion in credit card revenue, up 17.6% from a year earlier. Sales from its retail stores rose at a smaller 6.2% pace to $61.47 billion.

Target's lucrative receivables portfolio consists of both so-called private label cards, which typically have a smaller limit and can be used only at Target stores, as well as more profitable, co-branded credit cards that carry a Visa or MasterCard (MA Quote) logo. These can be used at any venue.

The value of the Target private-label business is that it's a huge relationship-builder. Target's private-label business generates relatively low returns, but it builds brand loyalty, and over time those customers can be converted into co-branded cardholders.