Twenty-two months ago Target (NYSE:TGT) put its credit card portfolio up for sale. On October 23 it announced Toronto-Dominion Bank (NYSE:TD) was buying its credit card portfolio for $5.9 billion. The move is a win-win situation that allows Target to focus on its retail operations while TD, the sixth largest bank in North America, gets a big boost to its credit card business. It's rare for retailers to own their own credit card businesses these days so although it took a long time for the deal to come to fruition it's better late than never. With Canadian expansion on the horizon, this deal couldn't have come at a better time.

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Canadian Expansion
Target is opening its first Canadian stores in early April with up to 135 scheduled to begin operations by the end of 2013. It paid $1.64 billion for 220 store leases from Zellers in January 2011. It gave back 31 leases it couldn't use, transferred another 39 to Walmart (NYSE:WMT) and the remaining 15 went to other retailers, leaving it with 135 store locations. For the first six months of 2012 through the end of July it's lost $116 million after-tax from its Canadian operations as expenses pile up. It might spend as much as $1.5 billion in 2013 renovating the stores so getting a cash infusion at this point certainly helps.

Give and Take
In every deal each party has to give something up in order to get something in return. In Target's case, it gives up ultimate ownership in its credit card portfolio and 10 cents earnings per share in year one of the deal; thereafter it should have no effect on its earnings per share. What it gets from the sale includes as much as $600 million in pre-tax profits, $5.3 billion in debt reduction (the rest in share repurchases) and the opportunity to continue servicing its credit card customers. Its REDcard credit and debit cards accounted for 12.8% of its overall revenue in the second quarter, a hugely successful program that gives cardholders 5% off every purchase and free online shipping when using its card. In one transaction it will reduce its long-term debt by 29%, putting the company's debt capitalization ratio at 45%, 900 basis points less than its current ratio. Once the Canadian stores are generating revenues, management will be able to pay debt down even further.

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Canada's Banks
On the same day TD announced it was acquiring Target's credit card portfolio, Royal Bank of Canada (NYSE:RY) was busy with an announcement of its own, picking up the Canadian assets of Ally Financial for $4.1 billion. Royal Bank made the deal to increase its auto lending business north of the border. Ally's $13.6 billion in Canadian assets will help solidify its position as the number one bank in Canada. With consumer lending on the wane, today's deals signifies Canada's banks are on the prowl for more growth both domestically and outside Canada. TD continues to build a strong U.S. retail banking business (a rare feat for Canadian banks) and taking ownership of Target's credit card program can only help its cause south of the border. Both banks have made smart deals.

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The Bottom Line
Usually when a deal is announced, whether it's a takeover or a trade, the winner is fairly self-evident. In the Target-TD example, it's a coin toss. TD gets a credit card portfolio that it says, "aligns perfectly with our risk profile and strategy." Further, the deal helps it meet its 2013 goal for $1.6 billion in adjusted earnings from its U.S. Personal and Commercial Banking division. Target's credit card program gets a strong banking partner for the next seven years while it also lowers its debt substantially. Both sides win.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.