Citigroup Buying Sears Credit Cards

It will get the branded MasterCards and store-issued plastic.
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Updated from 5:06 p.m. EDT

Citigroup

(C) - Get Report

lifted a major weight from

Sears'

(S) - Get Report

sagging shoulders Tuesday, agreeing to pay about $3 billion to acquire the company's struggling credit-card business.

Citigroup will acquire both the company's MasterCard-issuing business and its store-label accounts, making it the nation's largest private label card issuer.

Citigroup will take over the $29 billion portfolio for a 10% premium, or about $3 billion, to be paid at closing. At the closing, Sears will net pretax cash proceeds of approximately $6 billion, which represents the $3 billion premium and about $3 billion of Sears' own net invested capital returned.

Under the deal, Citigroup also will make additional payments and absorb additional costs over a 10-year period. Citigroup also will have to set aside money in a special loan loss reserve account to cover potential defaults on the newly acquired Sears card business.

In a conference call, Bob Willumstad, Citigroup president and chairman of its global consumer group, said the bank expects to finance the deal with debt and bank borrowings. In acquiring the eighth-largest credit card business, Citigroup also will get all of Sears' credit-card processing facilities and its card division employees.

Sears said earlier this year it would sell the portfolio to allow it to focus on its retail business. The announcement set off a rally in its shares, which had been burdened by worries about the credit quality at the card unit. Sears said Tuesday that the sale will permit it to retire debt, cutting its net debt load to $1.5 billion.

In postclose trading following the announcement of the deal, Citigroup shares dropped 2% and Sears surged 13%. Citigroup announced the deal just a day after it reported better than expected second-quarter earnings.

"This acquisition provides us with an opportunity to take a leadership position in the private label segment and solidify our current bankcard leadership position," said Sanford I. Weill, Citigroup chairman and chief executive.

Sears had been shopping its card business for several months and Citigroup was rumored to be an interested buyer. In fact, during a conference call on Monday to discuss its quarterly earnings, Citigroup Chief Financial officer Todd Thomson said the bank "loves the credit card business," when discussing potential acquisition targets.

The Sears card business could be the first of several acquisitions made by Citigroup this year, which has roughly $21 billion in cash on its balance sheet and recently filed a $15 billion registration to sell stock and bonds, some of which can be used to finance acquisitions. For several months, Weill and other Citigroup executives have expressed an interest in expanding the bank's reach through acquisitions.

The major credit rating agencies, Standard & Poor's and Moody's Investors Service, both gave their blessings to the deal. Moody's said the deal should "enhance'' Citigroup's already large credit card business. S&P, meanwhile, said Citigroup is "well positioned'' to manage the risks associated with acquiring the Sears card business, even though it comes with more potential credit risks than other card businesses

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