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NEW YORK (
Capital One(COF - Get Report)'s sale of a private label credit card portfolio to
Citigroup(C - Get Report) underscores the company's difficulty in crafting a revenue growth strategy.
Capital One on Tuesday announced a deal to sell its $7 billion portfolio of
Best Buy(BBY) private label credit card accounts to Citi, for undisclosed terms. However, the company also said it expected that "proceeds from the sale will approximate the book value of the accounts, resulting in no significant gain or loss on the transaction." The deal is expected to be completed during the third quarter.
Investors were not amused, sending Capital One's shares down 2% on Tuesday, while Citigroup's shares rose 1.5%.
One reason for investor irritation with Capital One is that the company effectively paid a premium of $2.6 billion last May to acquire roughly $30 billion in credit card loans from HSBC, which included the Best Buy portfolio. Another problem for investors is that the sale of the Best Buy portfolio followed a
disappointing fourth-quarter for Capital One. Making matters worse, the company reported on Friday that its
U.S. credit card portfolio balances declined by 3% in January.
When asked for comment for this article, a Capital One spokesperson pointed to comments from EVP for Card Partnerships Bill Cilluffo, included in the company's press release on Tuesday.
"We have a proven, scale partnerships infrastructure and a great portfolio of partners," Cilluffo said, adding that "our partnerships business continues to deliver strong contributions to our results and serves as a platform for future growth potential."
When discussing the company's private-label aspirations at a conference on Feb. 13, Capital One CEO Richard Fairbank said that "with the HSBC acquisition, we have a scale platform and we really have a real position in the space," and that the company was "going out and really looking to see if we can get new partnerships." He also hinted at the Best Buy portfolio sale announced just six days later.
"The key to success in this business is selectivity," Fairbank said. He added that the "three dimensions" that Capital One looks for in a credit card partner are the financial strength of the partner, the partner's desire to "truly build a franchise" using the card partnership, and "the nature of the contract."
"The sale of the Best Buy portfolio is a reversal of Cap One's efforts to build in private label, as it represents roughly half of the private label card portfolio acquired from HSBC," according to a report from Credit Suisse analyst Moshe Orenbuch published Tuesday. The report added that "this sale will further challenge COF in generating significant earnings growth and compounds the sustained weakness in card demand recently noted by management."
Downgrading Capital One
Capital One was downgraded to a "neutral" rating from a "buy" rating on Wednesday, by Guggenheim analyst David Darst.