J.C. PENNEY’S SHEDS INSURANCE DIVISION

Byline: Rusty Williamson

DALLAS — Allen Questrom’s clean, lean and mean vision for metamorphosing J.C. Penney Co. marched forward on Thursday with an agreement to sell the company’s Direct Marketing Services division, which includes J.C. Penney Life Insurance subsidiaries, for $1.3 billion in cash.
Penney’s is selling its DMS division to a U.S. subsidiary of Aegon, N.V., a global insurance firm with $230 billion in assets.
The sale also includes the establishment of a 15-year strategic marketing alliance between Penney’s and Aegon aimed at providing an expanded range of financial, insurance and membership services to Penney’s shoppers.
The deal calls for Penney’s to receive annual cash payments over the next 15 years pursuant to the terms of the marketing-services agreement. According to Penney’s, the present value of this additional revenue stream is estimated to be up to $300 million, bringing the present value of the transactions to about $1.6 billion.
The sale of the DMS division has been expected for some time in light of chairman and ceo Questrom’s mandate to cut the clutter from Penney’s 1,075 stores, revamp merchandising strategies and shed extraneous divisions.
Over the past five years, Penney’s DMS division has had a compound annual growth rate of 15 percent in revenue and 14 percent in earnings, and in 1999 completed its 12th consecutive year of revenue and earnings growth, according to Penney’s. DMS revenue in 1999 was about $1.2 billion.
Despite DMS’s sterling record, Penney’s has made no secret that it was shopping around the insurance and membership-services provider. As reported earlier, Questrom told a gathering of equity analysts earlier this week that selling the DMS division was under consideration.
Although analysts have suggested that Penney’s shed its 2,500-unit Eckerd drugstores division, Questrom said he remains bullish on the chain and its long-term viability within Penney’s infrastructure.
Proceeds from the DMS sale to Aegon will help reduce debt and will no doubt be pumped back into Penney’s core mid-tier moderate store, catalog and Internet businesses, which Questrom is meticulously recrafting.
“The proceeds from the sale, which are expected to be approximately $1.1 billion after tax, will significantly strengthen the company’s financial flexibility,” said Questrom. “We anticipate that the majority of these proceeds will be used for debt reduction. In combination with the $1 billion of cash investments on the balance sheet at the beginning of the year, the proceeds provide the ability to satisfy our financing requirements well into the future.
“This sale and strategic marketing alliance will allow J.C. Penney to focus on its retailing businesses. At the same time, J.C. Penney will better serve its customers through access to the diverse products and services of the Aegon family of businesses and their direct-marketing capabilities.”
The sale will generate a pre-tax book loss of nearly $100 million and will require Penney’s to reflect the operating results, along with the assets and liabilities, of DMS as a discontinued operation.
The closing of the sale and the commencement of the strategic marketing alliance are expected by the end of Penney’s second quarter.
Penney’s stock closed up 6.5 percent at $18.09 on Thursday.
Aegon, N.V. shares are listed on the New York, Amsterdam, Frankfurt, London, Tokyo and Zurich stock exchanges. Options on Aegon shares are traded on the Amsterdam Exchanges, the Philadelphia Stock Exchange and the Chicago Board Options Exchange.