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Believe GE CEO Jeffrey Immelt when he says banks are unlikely to try to buy his consumer finance unit. Few banks could afford the huge business, and regulators would never allow them to buy it, market watchers say.
May 23 -
Issuers of retail credit cards sought to exit the business en masse during the downturn. Now the industry's appeal is on the rise, along with a dramatic improvement in its performance.
August 17
If General Electric Co. (GE) moves ahead with an initial public offering of its consumer finance business, the spun-off company could face new challenges as it competes with larger lenders, according to industry analysts.
At around $50 billion of assets, the new firm would be smaller than Discover Financial Services (DFS), one of the smaller players in the credit card industry.
It could also lose certain advantages it enjoyed as a unit of one of the world's largest conglomerates. Through its parent, GE's consumer finance business has benefited both from funding cost advantages as well as the firm's deep ties to U.S. retailers.
"When you have rich parents and lose them, it turns into a very different organization," says Brian Riley, research director at CEB TowerGroup.
GE's interest in exploring an IPO for its consumer finance unit
"The capital markets are very receptive to IPOs," Immelt said, speaking in general terms, and not about any specific GE businesses. "So I think you basically have as good a setting as you could possibly have."
GE might have preferred to find a buyer for its consumer finance business, a majority of which consists of private-label credit cards loans, but so far it's been unable to do so.
The company
GE Capital Retail Bank had $27.5 billion in credit card loans outstanding as of June 30. It issues credit cards through retailers such as Walmart, Ikea, Amazon and others.
Credit card industry analysts say that GE's chances of exiting the business appear more favorable than they were in the heat of the financial crisis. Industry wide, losses on credit cards are currently at historically low levels. In the second quarter of this year, GE Capital's consumer segment recorded $828 million in profits.
"I think the appetite for an IPO would be pretty strong right now," says John Costa, a managing director at Auriemma Consulting Group. "I think there's actually a lot of merit to the strategy, and it may very well yield a higher price to GE than a conventional sale."
Others analysts believe that GE may not have any good alternatives to an IPO.
"I think that the private-label business has been on the market for some time," says Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods. "They're probably not getting a price that they believe is appropriate."
If GE did insist on selling the business to an existing lender, the number of potential buyers would appear to be small. That's partly because $50 billion in assets is a lot to absorb. And it's partly because few banks seem interested in private-label credit cards, which tend to have higher default rates than general-purpose credit cards.
"It's a limited supply of potential buyers out there that have experience in private label," says Robert Hammer, a card industry adviser.
For credit card issuers, private-label cards present a tricky proposition. The cards exist primarily to lure shoppers into specific stores, but many of those shoppers have spotty credit histories. So there can be tension between the retailer, which doesn't want to turn away potential customers, and the card issuer, which has to worry more about customers who don't pay their bills.
American Express (AXP) and Discover are both focused on building their own brands and haven't shown interest in entering the private-label card business.
Citi spent two years trying to sell its industry-leading private-label card business but couldn't find a buyer and
Wells Fargo (WFC) has expressed interest in building its credit card business, but earlier this week chief financial officer Timothy Sloan threw cold water on the idea that the firm needs to make an acquisition in order to do so.
"If the right acquisition comes along," Sloan said in remarks at the Barclays Global Financial Services Conference, "we'd be happy to take a look at it. But we don't feel that we need to make an acquisition to be able to grow that business."
While GE is likely to spin off the business, card companies that compete against GE would probably prefer that the firm find a buyer because mergers tend to cause short-term disruption that can give competitors an opportunity to swoop in and steal business.
KBW's Sakhrani says the ideal scenario for competitors would be for GE to sell the unit to a buyer that is new to the private-label credit card business.
