Synchrony Lost Walmart Card Deal in Battle With Capital One
(Bloomberg) -- Synchrony Financial said its credit-card deal with Walmart Inc. won’t be renewed and will expire next year.
The largest issuer of store cards said Thursday that it’s evaluating whether to sell the $10 billion in balances or retain the portfolio and convert qualifying customers to general purpose credit cards. Capital One Financial Corp. will take over as issuer of the Walmart’s private-label and co-branded credit cards beginning Aug. 1, 2019.
Synchrony, based in Stamford, Connecticut, dropped 10 percent to $30 at 4 p.m. in New York, the most since April 2017 and the biggest drop in the 68-company S&P 500 Financials Index. That’s a slight rebound after the company confirmed it had lost the contract, as the shares had dropped as much as 12 percent when the Wall Street Journal reported that Capital One had prevailed. Capital One slipped 2.5 percent.
Co-brand and private-label credit cards are a lucrative business for banks and retailers seeking to monetize a cardholder’s loyalty to a certain brand or store. Synchrony’s partnership with Walmart accounted for more than 10 percent of the interest and fees the bank earned on its loans last year, the company said in an annual regulatory filing. The lender has said its five largest programs -- Gap Inc., J.C. Penney Co., Lowe’s Cos., Sam’s Club and Walmart -- made up the majority of such revenue.
“Although we pursued a renewal with Walmart, we were unable to reach terms that made economic sense for the company and our shareholders,” said Sue Bishop, a spokeswoman for Synchrony. “We’re going to focus in areas of our business where there’s significant growth potential and attractive returns over time.”
The two strategic options -- whether to sell the balances or convert the portfolio to credit cards -- are both accretive to earnings relative to renewing the contract with Walmart, according to a regulatory filing. Bishop said there won’t be a decision made on the two options “in any quick manner.”
“We like the economics of this deal and we’re confident that the partnership will generate significant growth and value for years to come,” Tatiana Stead, a spokeswoman for Capital One, said in an emailed statement. Winning the partnership doesn’t change the company’s expectations to repurchase $1.2 billion of its shares between the third quarter of 2018 and the second quarter of 2019, she said.
Synchrony said in a regulatory filing on Thursday that selling the portfolio would free up $2.5 billion of capital, the majority of which it would use to repurchase shares. The company has identified as much as $350 million in ongoing cost savings it would realize related to the sale.
If the company retains the portfolio, it expects to convert the qualifying accounts to general-purpose credit cards beginning in the first quarter of 2019. This option would eliminate revenue-sharing agreements between the two companies, but Synchrony would still earn royalties on purchases made in Walmart for three years after the contract expires, the lender said in the filing.
Synchrony, which also counts Amazon.com Inc. as a partner, has been investing in mobile capabilities and working to expand its online savings account into a full-service bank. The company said earlier this month that it had completed the $6.9 billion purchase of PayPal Holdings Inc.’s credit-card receivables and renewed a partnership with the digital wallet provider through 2028.
Walmart will provide additional details about the card program in the coming months, the retailer said in a statement with Capital One. Moelis & Co. and Greenhill & Co. were financial advisers to Walmart, and Morrison & Foerster was its legal counsel. Wachtell Lipton Rosen & Katz advised Capital One on legal matters.
“Walmart and Capital One intend to offer highly innovative, digitally enabled credit card products that deliver great value to customers,” the companies said in the statement.
Capital One will create a small, separate team to oversee the Walmart partnership led by Chris Newkirk and Daniel Mouadeb, Chief Executive Officer Richard Fairbank said in a memo to employees obtained by Bloomberg. The team will work closely with the U.S. card business led by Mike Wassmer, according to the memo.
Capital One last week shuffled the senior managers in its credit-card partnership unit. Jimmy Cannon, executive vice president of the U.S. partnerships business, is leaving the bank in August and will be replaced by Buck Stinson, who currently leads the firm’s small-business card efforts.
Fairbank said last week his firm is focused on finding co-brand partners who view their card offerings as a way to deepen customer relationships versus “a profit center.”
“However important card partnerships were in the past, I think we should all understand: They’re more important in the emerging digital world,” Fairbank told analysts in a conference call. “Just because of the centrality of how payments play in the digital e-commerce environment.”
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