It’s been just over two years since Lloyds TSB offloaded its UK
credit card unit Goldfish to Morgan Stanley’s Discover Financial
Services, and now the beleaguered business is set to change hands
again with the announcement that Barclays has become the latest
owner. Barclays will acquire the UK Goldfish card portfolio
consisting of 1.7 million Goldfish and affinity card accounts with
approximately $4 billion of receivables; the Goldfish brand; its
operating facilities; certain legal entities; and staff.

The news is perhaps not surprising, given that it was only in
December 2007 that Discover announced a $422 million write-down in
the value of the business, due to what it referred to as the “very
challenging” UK consumer credit environment. Discover, which was
spun off by Morgan Stanley last year, said the non-cash impairment
charge would be equal to “all or substantially all” of Goldfish’s
goodwill and other intangible assets.

In a statement at that time, David Nelms, CEO of Discover, said:
“We have concluded that continued disruption in the UK financial
markets, higher interest rates and our decision to reduce our loan
exposure to the UK market have negatively affected the book value
of our Goldfish business.”

Nelms said efforts to refocus the Goldfish business had begun to
produce positive results. “We will continue implementation of
significant actions to improve the performance of our UK business,
and will continuously monitor our progress and assess options to
maximise shareholder returns,” he added.

Concentration on US core business

However, it appears that given a backdrop of faltering economic
conditions for consumer credit in the UK, Discover prefers to
offload Goldfish and take a substantial after-tax charge as soon as
possible, rather than struggle to keep the business going and risk
the value of Goldfish’s portfolio deteriorating further. Discover
said that exiting the UK card business will positively impact on
its earnings in the second quarter of 2008 and for the remainder of
the year, while at the same time it will free up cash and capital,
enabling Discover to concentrate on its core US card and
third-party payments businesses.

In a statement released on 7 February, Nelms said: “While we
have begun to see important progress in our UK business, the
funding and operating environment there continues to be a
challenge. We have concluded that the best way to maximise
shareholder value is through the sale of the Goldfish
business.”

What will surprise many in the industry is just how quickly
Goldfish’s value has fallen since its December 2005 valuation.
Then, Lloyds TSB sold the Goldfish credit card business to Morgan
Stanley for £1 billion ($1.76 million at the time), representing a
premium of £175 million. At that time Lloyds TSB said it expected
to recognise a profit of £70 million from the sale.

According to Barclaycard and Discover, the aggregate sale price
of the business is approximately £35 million payable in cash at
closing and subject to a post-closing adjustment. Discover expects
it will record after-tax charges of between $190 million and $210
million in the first quarter of 2008 associated with the
transaction. According to Barclaycard, Goldfish’s price
consideration is subject to an adjustment mechanism based on the
net asset value of the business at completion, estimated to be £129
million.

Barclaycard’s future plans

In 1996, Goldfish established its loyalty scheme, enabling it to
become one of the most rapidly growing credit cards in the UK
market. Aside from credit cards, which it offers under a number of
brands, Goldfish also provides loans and insurance products.
Barclaycard has hinted that it intends to roll out its credit
scoring and risk management capabilities across the portfolio.

Antony Jenkins, chief executive of Barclaycard, said:
“Barclaycard is one of the largest card issuers in the UK with
acknowledged expertise in risk management, customer data management
and marketing. Goldfish has similar credit characteristics to our
existing UK business. The combination provides an attractive
opportunity to deploy our expertise across a larger number of cards
and customers.”

Barclays expects to complete the acquisition in the first half
of 2008. It has not yet decided whether to retain the Goldfish
brand.