Citigroup has agreed to enter into a long-term agreement with Federated Department Stores, Inc. under which the companies will partner to manage Federated’s credit card business, including existing and new accounts.
Under the agreement, Citigroup will acquire Federated’s approximately $4.4 billion credit card receivables portfolio in two phases. Citigroup will initially acquire Federated’s receivables under management, which totaled approximately $3.2 billion at fiscal year end 2004. Additional Federated receivables, totaling approximately $1.2 billion at fiscal year end 2004, are expected to be transferred to Citigroup in May 2006 from the current provider. In addition, Citigroup is expected to acquire the approximately $2.2 billion credit card receivables portfolio of The May Department Stores Company (NYSE: MAY) within one year following the successful completion of its merger with Federated, expected in the third quarter of 2005.
Citigroup will pay a premium of approximately 11.5% to acquire each of the portfolios. The multi-year agreement also provides Federated the ability to participate in the ongoing success of the portfolio based on credit sales and certain other performance metrics of the portfolio after the receivable sale is completed.
This new relationship builds on Citigroup’s proven success in enhancing its distribution channels by forging alliances with industry-leading partners. The Federated and May credit card portfolios comprise a total of approximately 17 million active accounts.
The transaction is expected to be accretive to Citigroup earnings in the first year. It is expected to close in the third quarter, subject to applicable regulatory approvals.
Marge Magner, Chairman and Chief Executive Officer of Citigroup’s Global Consumer Group, said: “With nearly 140 million accounts worldwide, Citigroup is a global leader in credit cards. This relationship is part of our continuing effort to leverage our core strengths in partner alliances in the credit card market. We look forward to applying our innovative, world-class capabilities to help assure the ongoing success of the Federated and May retail partner programs and drive sustainable growth within our business.”
“Federated and May credit card customers will be prime beneficiaries of this new partnership,” added Steven J. Freiberg, Chairman and Chief Executive Officer, Citi Cards NA. “As the global leader in credit cards, Citigroup brings comprehensive, innovative and proven capabilities in a broad spectrum of the cards industry and by joining these with the expertise of Federated and May, we look forward to further enhancing the growth and performance of their credit card program and increasing its appeal to new and existing customers. Federated and May are recognized leaders in the department store sector and we look forward to working with its management to expand the success of their overall franchise.”
“We are excited to be joining forces with a world leader in the credit card business through this new alliance,” said Terry J. Lundgren, Federated’s Chairman, President and Chief Executive Officer. “We are exceptionally proud of the credit operation at Federated’s Financial, Administrative and Credit Services division, and pleased with the value that has been created in this business as a result of those efforts. We now look forward to working together with Citigroup to continue to enhance our relationships with our very best customers, while also building on our success in the credit business by capitalizing on Citigroup’s great expertise and commitment to the credit business.”
The companies noted that Federated and May credit card customers will continue to be serviced through Federated’s service centers located in Mason, Ohio, Clearwater, Florida and Tempe, Arizona, and May’s service centers in Lorain, Ohio and Earth City, Missouri.
Federated currently operates more than 450 stores under the names of Macy’s and Bloomingdale’s. May currently operates approximately 490 department stores under the names of Famous-Barr, Filene’s, Foley’s, Hecht’s, Kaufmann’s, Lord & Taylor, L.S. Ayres, Marshall Field’s, Meier & Frank, Robinsons-May, Strawbridge’s and The Jones Store. It also operates 241 David’s Bridal stores, 450 After Hours Formalwear stores, and 11 Priscilla of Boston stores. The companies combined revenues for the year ended January 29, 2005 were approximately $30 billion.
Citigroup (NYSE: C), the leading global financial services company, has some 200 million customer accounts and does business in more than 100 countries, providing consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, insurance, securities brokerage, and asset management. Major brand names under Citigroup’s trademark red umbrella include Citibank, CitiFinancial, Primerica, Smith Barney, Banamex, and Travelers Life and Annuity. Additional information may be found at www.citigroup.com.
Federated Announces Strategic Credit Alliance with Citigroup; Transactions Encompass Receivables Sale and Ongoing Partnership
Federated Department Stores, Inc. announced that it has entered into a strategic alliance with Citigroup to operate Federated’s proprietary and co-branded Visa credit card businesses.
Under the terms of this agreement, it is anticipated that Citigroup will purchase all receivables of Federated and The May Department Store Company (NYSE:MAY) (after its acquisition by Federated) in three separate transactions for an upfront premium of approximately 11.5 percent. In total, these transactions are expected to produce after-tax proceeds of approximately $4.5 billion.
Additionally, Federated and Citigroup have entered into a multi-year agreement that provides for Federated to receive future ongoing payments. These payments will be based on credit (proprietary and Visa) sales and certain other performance metrics of the credit portfolio after the receivables sale is completed. Federated and Citigroup also have agreed to work together on various marketing initiatives designed to accelerate Federated’s same-store sales gains, as well as on initiatives to further enhance credit growth and profitability, particularly as it relates to the co-branded Visa portfolio.
Federated’s Financial, Administrative and Credit Services (FACS) division, headquartered in suburban Cincinnati, will continue to manage key customer service functions, and no job losses are expected as a result of the transactions. No changes are planned to Federated’s credit card or loyalty reward programs, and customers should continue to use their cards in the same manner as they do today.
“We are very excited to be joining forces with a leader in the credit card business through this new alliance with Citigroup,” said Terry J. Lundgren, Federated’s chairman, president and chief executive officer. “We are exceptionally proud of the credit operation at FACS and pleased with the value that has been created in this business as a result of those efforts. We now look forward to working together with Citigroup to continue to enhance our relationship with our very best customers, while also building on our success in the credit business by capitalizing on Citigroup’s great expertise and commitment to the credit business.”
Marge Magner, chairman and chief executive officer of Citigroup’s Global Consumer Group, said: “With nearly 140 million accounts worldwide, Citigroup is a global leader in credit cards. This relationship is part of our continuing effort to leverage our core strengths in partner alliances in the credit card market. We look forward to applying out innovative, world-class capabilities to help assure the ongoing success of the Federated and May retail partner programs and drive sustainable growth within our business.”
The initial closing, which includes Federated’s owned proprietary and Visa receivables (totaling $3.2 billion at the end of fiscal 2004), is subject to regulatory approvals and other customary closing conditions, and is expected to occur by early in Federated’s fiscal third quarter. Federated expects to receive approximately $2.3 billion in after-tax proceeds after paying $1.2 billion of outstanding asset-backed securities.
A portion of the receivables generated by Federated’s retail operations currently is owned by General Electric Capital Corporation (GECC). The GECC portfolio, with $1.2 billion in receivables at the end of Federated’s fiscal 2004, is expected to be transferred to Citigroup in late April of 2006. At that time, Federated will repurchase the portfolio from GECC and sell it to Citigroup on the same terms as the initial Federated portfolio sale.
Following a successful conclusion of Federated’s pending acquisition of The May Department Stores Company, which is expected to be finalized in the third quarter of this fiscal year, Federated anticipates that within 12 months following the May closing it will sell the May credit portfolio, which included $2.2 billion in receivables at yearend 2004, to Citigroup on essentially the same terms as the initial Federated portfolio sale.
The company anticipates using the proceeds from these transactions either to fund the May Co. acquisition or to repay acquisition-related debt, depending on the timing of the closings. Upon elimination of this debt, cash flow from the transactions may be used to repurchase Federated stock.
Assessing the benefits for Federated, Karen Hoguet, Federated’s executive vice president and chief financial officer, noted that these transactions “convert our receivables to cash, with a premium, and allow us to continue to participate in the ongoing growth and profitability of our credit business. On a pro-forma basis, had this partnership been in place in 2004 and were the May merger completed, these transactions would have been accretive to earnings and at the same time our balance sheet would have been materially strengthened.”
Federated was advised in the transactions by Credit Suisse First Boston LLC, First Annapolis Consulting, Inc. and Simpson Thacher & Bartlett LLP. Jones Day and Sidley Austin Brown & Wood LLP also provided assistance on the transactions.
Federated, with corporate offices in Cincinnati and New York, is one of the nation’s leading department store retailers, with annual sales of more than $15.6 billion. Federated operates more than 450 stores in 34 states, Guam and Puerto Rico under the names of Macy’s and Bloomingdale’s. The company also operates macys.com and Bloomingdale’s By Mail.