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Saks in $1.4B Deal With Household

NEW YORK — With an eye toward increasing its financial flexibility, Saks Inc. will sell the majority of its private label credit card accounts and balances to Household International for $1.4 billion.<br><br>The department store operator,...

NEW YORK — With an eye toward increasing its financial flexibility, Saks Inc. will sell the majority of its private label credit card accounts and balances to Household International for $1.4 billion.

The department store operator, however, will retain the customer service function of the business through a 10-year alliance with Household. Sale of the accounts is set to close by the end of the third quarter on Nov. 2.

Fewer than 10 positions in Saks’ credit card operations — which carry a workforce of 550 — will be eliminated through the alliance.

Household will also assume the firm’s securitization liabilities, estimated at $1.1 billion, leaving $300 million in net cash proceeds for the Birmingham, Ala.-based department store operator. Proceeds will be used to repurchase common stock and reduce debt. The purchase price also buys Household the retailer’s owned accounts receivables and an undisclosed premium.

Saks will continue to open new accounts, provide transaction authorization, make billing adjustments and respond to customer inquiries. In addition to providing ongoing compensation to Saks for managing the customer service business, Household will own the majority of new accounts and balances generated..

The deal is expected to have no effect on Saks’ EPS in 2003 and to be “modestly accretive” in 2004.

Steve Sadove, vice chairman of Saks, told WWD: “This is unique because when most retailers outsource credit operations, they outsource the customer service aspect as well. This is not a downsizing. This is a true alliance. We’re selling the accounts, but not the servicing of the customer.”

Sadove added that the credit card operation generates earnings (before interest, taxes, depreciation and amortization) in the neighborhood of $100 million. Even so, selling it “provides us enormous financial flexibility,” by reducing leverage and risks associated with financing the operation. “We won’t have to deal with the vagaries of interest rates or bad debt,” said Sadove.

Asked if other asset sales are being contemplated, he said, “No, but we are always looking at individual stores, either contractions or additions, as part of the normal course of business.”

Saks also hopes the deal will beef up its top line through combined efforts with Household in the marketing analysis and database management areas.

Dick Klesse, Household’s national director of business development and client relations in its retail services division, added that his company’s expertise in the private label credit business “allows us to really select the more creditworthy customers.”

Moody’s Investors Service debt analyst Marie Menendez saw the deal as a credit neutral. It gives Saks “some additional cash, and some operating and financial flexibility,” she said.