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Target Card Business In Play

Some say a deal could happen as soon as this month.


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may be working out ways to monetize its credit card business, according to sources following the retailer.

Last week, finance chief Doug Scovanner told investors at a Goldman Sachs retail conference that Target would consider exploring strategic alternatives for its real estate and credit portfolio, as long as any possible deals don't disrupt its relationship with customers.

Target's shift comes less than two months after William Ackman's Pershing Square Capital revealed a 9.6% stake in the nation's second-largest discount retailer. Pershing's nearly $2 billion stock purchase kindled speculation that the firm would look to pressure Minneapolis-based Target to shed its credit card operations and real estate portfolio to focus on retailing.

Now observers speculate that a sale of Target's credit business may be announced by the end of the month.

The events seem to signal a change of heart for a company that has kept its credit operation in house, even as retail peers such as





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have fled the card business.

"They have been challenged for five years, and for five years they have said that a sale would absolutely not be advantageous to monetize the portfolio," says Howard Davidowitz, chairman of retailer consulting firm Davidowitz & Associates in New York.

Indeed, last year, Target told

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that it was not willing to shed its credit card business. During its most recent earnings report, the retailer reiterated the importance of its credit cards, whose pretax earnings rose 34% from a year ago in the second quarter.

But the company certainly appears willing to consider a deal now.

"We're always open for an economic transaction that will add value for our shareholders -- regardless of who our shareholders are," said a Target spokesman. He declined to comment on specifics about the retailer's strategic plans.

Officials at Pershing Square in New York didn't return calls.

If Target has changed its tune, it's possible that more is behind the shift than interest from hard-charging activist Ackman. Observers note the deteriorating credit environment.

For one, Davidowitz suggests that Target has been able to outpace rivals


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and Sears without cutting prices, largely because it was able to push its credit cards to its customers -- and rack up juicier profits.

"Their record is superb, but the one lingering question about Target is in the credit business," says Davidowitz. "How much of sales growth is really associated with credit extension?"

There's certainly cause for concern, given the run-up in credit tied to the overwrought mortgage lending boom. The fear now is that consumers may have been getting hopped up on leverage not just in the home arena but in credit cards as well.

If that's the case, Target's growth prospects could be seriously crimped, suggests Davidowitz.

On the other hand, Whitney Tilson, founder and managing partner of investment firm T2 Partners in New York, believes that if any retailer has been prudent in this uncertain environment, it has been Target.

"Target, if anything, has been very conservative," Tilson says. He says Target has maintained a relatively pristine portfolio by extending credit to only the most creditworthy customers with the highest FICO scores.

Target is the largest holding for Tilson and his funds, which own some 600,000 shares and options of the discount retailer.

Pershing Square's Ackman believes that Target has much more room to grow and can further eke out value by shedding its credit card operations and ancillary real estate assets.

Even if it does make sense to attempt to hawk the credit card operation, the recessionary atmosphere on Wall Street could narrow the field of possible buyers.

Back in March,


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paid some $1.5 billion for Kohl's credit card business. But the world has changed, and banks have been hammered on worries that they are stuck with hundreds of billions of dollars worth of bridge loans. Other financial institutions, meanwhile, are facing the unprecedented problem of being unable to roll over short-term commercial paper financing.

It appears unlikely now that financial companies -- the most logical buyers for credit cards -- would aim to purchase credit card debt. On the other hand, it is possible that a hedge fund or distressed investment vehicle might be willing to partner with Target.

The giant retailer's intent now may be to maintain control of the valuable credit card business while unlocking cash. But the structure of such a deal may be the key to whether it gets done -- particularly for a business that may prove dicey in the next few years.