Synchrony has a lot to lose in fight with Walmart
When lots of money is at stake, divorce proceedings often turn ugly. Long-held grievances get a public airing, and both sides frequently suffer damage.
So it may be with the retail giant Walmart and, even more so, its longtime credit card partner, Synchrony Financial. The two firms split up in July after a 19-year relationship, setting off rancorous negotiations over the potential sale of a portfolio that consists of approximately $10 billion in existing loans.
Then on Thursday the Bentonville, Ark.-based chain sued Synchrony for at least $800 million, prompting a volley of charges and counter-charges.
The open hostilities appear to hold more peril for Synchrony than they do for Walmart. For one, the retail behemoth has a market capitalization that is about 15 times larger than Synchrony.
Perhaps more ominously, the lawsuit, filed by Walmart in U.S. District Court in Arkansas, would seem to diminish Synchrony’s chances of renewing its partnership with Sam’s Club, the warehouse chain owned by Walmart. That deal expires in 2021, and Synchrony has previously vowed to be aggressive in trying to renew it.
“This is likely the beginning of what could be a drawn-out litigation process,” Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods, wrote in a research note Thursday, “and doesn’t bode well for the Sam’s Club renewal.”
On Friday, Synchrony’s share price fell by 10%, while Walmart’s moved up slightly. The Stamford, Conn., company has lost roughly 17% of its market value since Walmart said in late July that was ending its relationship with Synchrony and shifting its card business to Capital One Financial.
Walmart’s lawsuit alleges that Synchrony breached its contract in several significant ways, though some of the specific claims are blacked out because they include confidential business information. One claim that was made public is that Synchrony underwrote the Walmart portfolio in a way that exposed the program to significant credit risk.
Walmart’s implication seems to be that Synchrony is placing an unreasonably high valuation on loans that are likely to result in higher-than-normal losses.
If Synchrony does agree to sell the loan portfolio, Capital One, which in August became the exclusive issuer of Walmart credit cards, would be the buyer. At issue is the sale price: If Capital One refuses to pay the amount that Synchrony is seeking, then Walmart could have to make up the difference.
Moshe Orenbuch, an analyst at Credit Suisse, wrote in a research note Friday that while Synchrony expects to get a premium for the transfer of the portfolio, Capital One has indicated that it does not want to pay a premium for a portfolio with a loss rate near 11%.
“It appears that would leave Walmart having to add the economics, and the suit certainly seems well-timed to advance their position,” Orenbuch wrote.
Synchrony, which was spun off from General Electric in 2015, responded to the suit by putting at least some of the blame for the portfolio’s loss rate on Walmart. The credit card issuer argued that Walmart failed to promote the credit cards either in its stores or online, which contributed to their performance.
“Synchrony applied the same underwriting and decision-making processes to the Walmart portfolio as it does to all portfolios,” the company said in a statement. “The credit performance of the portfolio was simply driven by the credit distribution of the applicants, the relative performance of Walmart cardholders and Walmart’s failure to promote the program.”
Synchrony also accused Walmart of walking away from negotiations and rushing to file suit. It called the lawsuit an attempt to avoid paying the fair market value for the portfolio, as the contract between the two companies requires.
“While we would have preferred to resolve this matter commercially, Synchrony intends to file substantial claims that will demonstrate Walmart failed in the most basic elements of our agreement,” the company stated.
Lisa Lanspery, senior vice president of public relations at Synchrony, said in an interview that Walmart is offering less money for the loan portfolio than other comparable packages have attracted over the last decade.
And she stated that it is unusual for a retailer — in this case Walmart — to take such an aggressive role in negotiations between two financial institutions over the sale of a credit card portfolio. “It’s always done between the two banks,” she said.
When asked about Sam’s Club, Lanspery said that the warehouse chain remains a valued partner of Synchrony. “We’re not going to speculate on future contract negotiations, or hypothetical future contract negotiations,” she added.
A Walmart spokesman declined to respond to allegations made by Synchrony, though the company did provide a statement about the lawsuit.
“Synchrony breached its contractual obligations to Walmart and as a result, the damages to our company are estimated to be at least $800 million,” the retailer stated.
“We made every attempt to resolve this business dispute and avoid litigation, however Synchrony has failed to take responsibility for its actions. We fully expect Synchrony to manufacture counterclaims in an effort to shift the focus away from its own conduct.”
The partnership with Walmart accounted for more than 10% of the total interest and fees on loans that Synchrony collected in 2017, according to a regulatory filing.
The $100 billion-asset card issuer has said that it may hold onto the Walmart portfolio and seek to convince existing card holders to switch to a credit card that has no affiliation with Walmart.