Toronto-Dominion Bank is acquiring the existing U.S. credit card portfolio of Target Corp. in a seven-year deal that comes about five months before the giant discounter is set to open its first stores in Canada.
The agreement, announced on Tuesday morning, involves a credit card portfolio with a current gross outstanding balance of $5.9-billion (U.S.). TD would become the exclusive issuer of Target-branded Visa and private-label consumer credit cards to Target's U.S. customers.
"Our agreement with Target will significantly expand our presence in the North American credit card business," said Ed Clark, chief executive officer at TD. "We're excited to be working with Target's strong team and leading retail brand. This asset purchase aligns perfectly with our risk profile and strategy."
The deal will contribute to TD achieving its adjusted earnings target of $1.6-billion from its U.S. personal and commercial segment in 2013, he said.
Target, which will start opening its first stores here in March, is expected to shake up the retail segment with its cheap-chic offerings that span from fashions to food. Target is also expected to launch its popular REDcard Rewards program in this country, which offers U.S. customers a 5 per cent discount on purchases at the chain's stores. The credit-card is a key part of Target's growth strategy because it encourages customers to return to the stores to buy more products, the company has said.
Under terms of the deal, TD would acquire more than 5 million active Visa and private-label accounts and will fund the receivables for existing Target Visa accounts and all existing and newly issued Target private label accounts in the U.S.
Andre-Philippe Hardy, an analyst at RBC Capital Markets, said TD's proposed acquisition of Target's credit-card portfolio is unlikely to affect its share price, given its modest size. TD expects the portfolio to produce a return on assets of approximately 100 basis points in the first year. The transaction will be funded with available resources and is to close the first half of 2013.
Gregg Steinhafel, chief executive at Target said: "This transaction achieves all of Target's strategic and financial goals for a portfolio sale. We look forward to working with this premier global financial institution to continue Target's long history of innovation in our guest-focused financial services strategy."
The agreement provides for TD and Target to share in the profits generated by the portfolios, with Target having the more substantial interest. Target will be responsible for all elements of operations and customer service and will bear most operating costs to service the assets, it said.
TD will control risk management policies and regulatory compliance and will bear all costs related to funding the portfolio. In addition, TD will have a team on-site in Minneapolis to work with existing Target staff in overseeing the program.