February 8, 2008 / 9:12 AM / 11 years ago

Barclays buys Goldfish credit card business

NEW YORK (Reuters) - Discover Financial Services said on Thursday it agreed to sell its Goldfish credit card unit in Britain to Barclays for $70 million (35 million pounds), abandoning a money-losing business it bought two years ago for $1.68 billion, as consumer credit worsens.

Barclays will acquire 1.7 million Goldfish and affinity card accounts with about 2 billion pounds of receivables, and take on Goldfish’s brand, staff and facilities. The card business includes MasterCard and Visa.

Discover, the fourth-largest credit-card network, will take a first-quarter charge of $190 million to $210 million and said the sale should improve earnings for the rest of the year.

“While we have begun to see important progress in our UK business, the funding and operating environment there continues to be a challenge,” Chief Executive David Nelms said.

The company lost $56.5 million in its fourth quarter ending November 30, as it wrote down substantially all of Goldfish’s goodwill and other intangible assets. Discover had on December 20 reported an $84.1 million loss, but revised that number in a late Thursday regulatory filing to adjust some tax benefits.

Other lenders also have struggled in Britain with mounting consumer credit losses.

Last week, Citigroup’s British Internet bank Egg said it would cancel 161,000 customers’ credit cards because the credit profiles of those customers had deteriorated.

Riverwoods, Illinois-based Discover expects the Goldfish sale to close by the end of May, pending regulatory approval, and will allow it to focus on its profitable U.S. card and third-party payments businesses.

“The sale is a net positive, given that it eliminates a drag on earnings (and) frees up capital, which we estimate to be $190 million,” wrote Michael Taiano, an analyst for Sandler O’Neill & Partners LP. He rates Discover “sell,” citing expected higher credit losses “well into 2009.”

Britain’s Financial Services Authority said on January 29 that lenders face the toughest conditions since the early 1990s.

TRAILING RIVALS

Barclays is Britain’s largest credit card provider, with 9.6 million customers. It declined to say whether it will keep the Goldfish brand, which has been heavily advertised.

Antony Jenkins, chief executive of Barclaycard, said Goldfish has similar credit characteristics to Barclays’ card business and that his bank would benefit from adding scale.

In February 2006, Morgan Stanley, which owned Discover at the time, acquired Goldfish from Lloyds TSB Group for $1.68 billion, regulatory filings show.

International card losses, totaling $596.2 million last year before taxes, have caused Discover shares to lag those of rivals American Express and MasterCard.

Discover shares have fallen 43 percent since Morgan Stanley spun it off at $28.50 per share at the end of June 2007.

In the same period, American Express fell 24 percent, while MasterCard rose 21 percent. Visa Inc, the largest card network, is expected to conduct an initial public offering this year.

As a result of the sale, Discover will treat its international card business as discontinued operations. It was not immediately clear if there might be further losses. Discover did not immediately return a call for comment.

Discover shares closed up 44 cents, or 2.8 percent, at $16.21 on the New York Stock Exchange.

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