A Canadian Tire store in North Vancouver, B.C.JONATHAN HAYWARD/The Canadian Press
It took almost a year, but Canadian Tire has finally secured a partner for its credit card portfolio, bringing Bank of Nova Scotia in as a part-owner.
The benefits to Scotiabank are clear cut. The lender is aggressively pursuing expansion in a business line it has neglected in the past, and a deal with the country's eighth-largest credit card provider immediately gives the bank some heft.
It's been harder, though, to see what Canadian Tire gets out of it. When the retailer first announced plans to find a partner, chief executive officer Stephen Wetmore stressed that the search wasn't driven by a desire to free up capital. Instead, it was all about lowering financing risk and creating a less complex balance sheet.
But Canadian Tire didn't want to scare any potential partners away, so executives didn't elaborate on those points. For that reason, people started to wonder if Canadian Tire was more or less looking to rent out a bank's balance sheet, by either unloading some receivables to a financial institution or tapping a lender for funds when needed.
Canadian Tire says it got what it wanted in the deal, and finally elaborated on its objectives on a conference call Thursday morning.
"One of the foremost objectives that certainly I had going into this thing was the people should just stop worrying about a retailer, Canadian Tire, being involved with a financial services business that might need funding some day in a disrupted market," Mr. Wetmore said.
What he was alluding to was the financial crisis, when the securitization market all but shut down. Like the banks, Canadian Tire securitizes – or packages and sells off – its credit card loans to fixed-income investors in order to fund its business. But unlike the banks, Canadian Tire doesn't have myriad ways to fund itself, so when the securitization market dries up, the retailer can be in a bind.
What Scotiabank is offering is a "rock-solid backstop," in Mr. Wetmore's words, that will ensure investors never have to worry about funding issues again. Scotiabank has committed $2.25-billion – $250-million in a revolving line of credit and $2-billion through a note purchase facility – that will allow Canadian Tire to fund itself in times of market stress.
However, Scotiabank – or any lender for that matter – didn't want to simply offer up cash in a time of crisis and get little in return. To get something substantial out of the deal the bank is taking a 20-per-cent stake in Canadian Tire's financial services business for $500-million.
Mr. Wetmore told analysts that some banks weren't interested in an equity position. Instead, they would have preferred to simply buy some of the retailer's credit card receivables. But Canadian Tire was looking for more of a long-term commitment, and envisioned a broader strategy stemming for the partnership.
"Scotiabank immediately understood and shared our vision for what the world's most strategic retail and banking partnership could look like," Mr. Wetmore said in an interview. ("World's most" might be a bit of stretch, but you get the idea.)
"We're both working to earn new loyal customers among new Canadians – people who have not grown up with our brands – and together, we can offer new Canadians a bank account, their first credit in Canada and valuable offers to introduce them to Canadian Tire, [and] Mark's [Work Wearhouse clothing chain] and offer access to our Jumpstart program to get their kids active in community sports," he added.
"We're both facing unprecedented change in how Canadians shop and bank, how Canadian's pay for things – new payment vehicles – and options for buying online and with mobile devices. It makes the most sense in the world that a leading bank and leading retailer would work more closely together to bring new technology to the market that is game changing to help our customers," Mr. Wetmore said.
There's also an unforeseen added bonus. Because Scotiabank is buying a stake, the financial services business was suddenly handed a market valuation. Many investors still think of Canadian Tire as a retailer, even though the company generated more cash flow from financial services last quarter than it did from retail, so its financial arm typically doesn't get much consideration.
"We're pleased that people are seeing value of this business," chief financial officer Dean McCann said on the call Thursday. "I think historically in the marketplace, it hasn't been, if you will, recognized."