Let the Bidding Begin for Providian

The card issuer's woes go way beyond its high-risk customers

For much of the past decade, math whiz Shailesh J. Mehta's Providian Financial Corp. (PVN ) ran rings around rivals. By using everything from cable TV to the Net to troll for business and offering credit cards to students and other high-risk borrowers, he quickly turned Providian into the nation's fifth-biggest card company, with more than $30 billion in loans outstanding. The company had a finger in the wallets of one in eight American households. Indeed, it was doing so well that it was sixth in BusinessWeek's annual ranking of the 50 best corporate performers.

Today, the sparkle is gone. Mehta is out as chairman and will remain CEO only long enough to find a successor--if one is named. And Providian is effectively on the block. The San Francisco company will "explore absolutely every option" to get a good return for shareholders, promises J. David Grissom, hurriedly appointed chairman on Oct. 18. They could do with a fillip: Shares have fallen 92% since July, to barely over $4 on Oct. 24. But getting a lift may be hard without breaking up the company. "I would question whether this is a viable, going concern," says Prudential Securities Inc. analyst Bradley Ball.

So now, the issue is: Who will buy Providian's loan portfolio, and for how much? Analysts figure Citigroup (C ), MBNA (KRB ), and Bank One (ONE )--the three largest card companies--might be interested in its $22.3 billion worth of loans to top- and middle-ranking borrowers, and Citigroup's Associates unit or Household Finance in its $9.4 billion in subprime loans. Buyers might pay a 5% to 10% premium on the higher-quality loans, but they might want an incentive to take away the low-rated stuff, says Michael R. Hughes, a Merrill Lynch & Co. analyst.

Lately, times have been hard for all credit-card issuers as bankruptcies have risen, bad debts have mounted, and economic prospects have remained dim. But they have proved especially troubling for Providian, whose charge-offs for uncollectible loans have climbed from 7.6% of assets last fall to 10.3% now and are likely to top 12% by yearend. For most companies, they're still below 5.5%. Worse, solvent customers are charging less and paying down debt. Mehta, who earned a PhD at Cleveland's Case Western Reserve University, partly by researching the math used in the credit-card industry, has complained that consumer purchasing has been well below expectations. After saying on Oct. 18 that he was "frustrated" by Providian's failures, Mehta refused to answer analysts' questions. He declined to talk with BusinessWeek.

In reality, Mehta's brainchild has been troubled for a while. For one, Providian's hard sell to high-risk customers at times may have crossed the line into hucksterism. Last year, it paid $300 million to settle charges by the Comptroller of the Currency and the San Francisco District Attorney that it had "misled and deceived" consumers with less than candid marketing. Officials claimed its telemarketers refused to specify promised "great savings" on interest rates and failed to spell out extra charges on "no annual fee" cards. Providian settled without admitting or denying the charges.

FUMING ANALYSTS. This year, Providian pulled in its horns. In March, it stopped running TV ads with 800 numbers to call to apply for credit cards. It ratcheted down a TV campaign for GetSmart.com, a financial Web site that offered cards with rates as high as 27.99%. It tried to pitch cards to upscale clients. But such moves were too little, too late.

When Wall Street got wind of the mounting problems, Providian's share price went into freefall (chart). In August, the company quietly revised its practices for writing off bad accounts, delaying the impact of customer bankruptcies for up to 30 days. Analysts fumed--and cut their earnings outlooks. Then, on Sept. 4, Mehta warned that this year's earnings will come in some 7% lower than expected. His resignation was the last straw. "They've lost their credibility with investors," says Robert B. McKinley, CEO of CardWeb.com, which tracks the credit-card business.

Now that his numbers no longer add up, Providian's math whiz faces a bleak future. Rather than breaking in a successor, he may have to decide which of his rivals will get the business he built.

By Joseph Weber in Chicago

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