Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Is Citigroup Inc. (C)’s Best Buy Co., Inc. (BBY) Deal Worth It

This article is aimed at exploring the details of Citigroup Inc. (NYSE:C)’s deal with Best Buy Co., Inc. (NYSE:BBY) and what specific benefits Citigroup could extract from it. The deal holds considerable importance for the bank’s shareholders since it reverses Citi’s strategy of selling its store-branded credit card business.

Citigroup Inc (NYSE:C)The Deal

In a step toward boosting the size of the bank’s business, Citigroup Inc. (NYSE:C)’s CEO Michael Corbat inked a deal with Best Buy to take over the electronics retailer’s credit card operations from Capital One Financial. Citigroup will be able to manage and issue Best Buy Co., Inc. (NYSE:BBY)’s credit cards within the US. According to the news reported by Bloomberg, another deal will enhance Citigroup’s loan portfolio with around $7 billion. Since loans are considered a bank’s asset, this addition in the loans portfolio will help Citigroup increase its returns. The deals are expected to be closed by the third quarter of the current year, and the Citigroup Inc. (NYSE:C)’s current year’s results would not be affected by the deals.

Strategy Flip Flop

The store-branded cards business is the same business that Citigroup once sought to sell as part of its Citi Holdings unit. However, now the same Corbat who was heading Citi Holdings back then is committed to growing the size of this business. It’s considered  another premier retail franchise for Citi and already providing support to the bank’s bottom line. Citigroup Inc. (NYSE:C)’s store-branded cards business is already servicing over 90 million customers and reported a bottom line of $1.5 billion during 2012, compared to $1.48 billion in 2011. This growth in the bottom line came despite a 4% decline in the top line over the same time period.

Benefits Of Best Buy Deal

The addition of Best Buy Co., Inc. (NYSE:BBY)’s portfolio will allow Citigroup to add to its Citi Retail Services card portfolio, which currently ranks at an estimated $40 billion. The announced portfolio acquisition is consistent with Citigroup’s re-segmentation of the business back into “core” operations, and its desire to grow loans and revenues.

My estimate is that this acquisition could add pre-tax profits within the range of $290 million -340 million in 2014. More importantly, this transaction will generate U.S.-based earnings, which will help Citigroup utilize its significant deferred tax assets before they expire. Currently, Citigroup Inc. (NYSE:C)’s deferred tax assets have swelled to over $55 billion and still growing despite three years of profits.