By  on June 3, 2005

NEW YORK — In a complicated three-step deal, Federated Department Stores Inc. will sell off its credit card portfolio, including its receivables and those from May Department Stores Inc., to Citigroup for about $4.5 billion.

The sale will help fund and pay off the debt from Federated's $17 billion acquisition of May, expected to be completed in November. It could also help Federated buy back stock.

Citigroup will operate Federated's proprietary and cobranded Visa credit card businesses and provide Federated with payments based on sales through those cards and other performance metrics of the credit portfolio after the receivables sale is completed. In addition, the two companies will collaborate on marketing initiatives. The payments will continue for 10 years; the deal includes an option to renew for three more years.

Federated's Financial, Administrative and Credit Services division, in suburban Cincinnati, will continue to manage customer service functions. No job losses are expected and no changes are planned to Federated's credit card or loyalty programs.

"It's a big, up-front chunk of change that Federated can use to expand and improve their primary business — retail — and to deleverage its balance sheet from debt service for the May acquisition," said Arnold Aronson, managing director of retail strategies, Kurt Salmon Associates.

The deal is complicated because it has three separate closings. First, it involves selling Federated's proprietary and Visa credit operations to Citigroup.

Secondly, some of the receivables generated by Federated's retail operations have long been owned by General Electric Capital Corp. The GECC portfolio, with $1.2 billion in receivables at the end of Federated's fiscal 2004, will be bought back by Federated and then resold to Citigroup.

And thirdly, Federated said within 12 months following the May closing it will sell to Citigroup the May credit portfolio, which included $2.2 billion in receivables at yearend. "This series of transactions leaves us in a great position," said Karen Hoguet, Federated's executive vice president and chief financial officer, during a conference call Thursday. She said it will enable Federated to still provide "high-level service" to its credit customers, and will "strengthen our balance sheet in a material way." Furthermore, the deal enables Federated to continue to participate in the profitability of the credit card business, she added.

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