By Rachel Katz and Dan Lonkevich
Bloomberg News
Federated Department Stores Inc., the owner of Macy’s and Bloomingdale’s, agreed Monday to buy May Department Stores Co., owner of Filene’s, for $11 billion to become the second-biggest U.S. department-store company.
Federated will pay $35.50 in cash and stock for each May share and assume $6 billion in debt, the companies said in a statement Monday. Federated CEO Terry Lundgren will run the new company, which, with more than 1,600 stores and $31.2 billion in sales, will be second only to the soon-to-be-combined Kmart Holding Corp. and Sears, Roebuck & Co.
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“It’s all about scale,’’ said John Zielinski, who helps manage about $82.9 billion at Chicago-based Neuberger Berman, which owns Federated and May shares. “The more scale you can
bring if you’re a buyer of goods, the better position you’re in to negotiate with vendors.’’
The purchase allows Federated to save $450 million by 2007 as department stores get squeezed by discounters including Wal-Mart Stores Inc. and luxury chains. Minneapolis-based Target
Corp., the No. 2 U.S. discount retailer, posted a same-store sales gain last year of 5.3 percent while Dallas-based Neiman Marcus Group Inc. jumped 12 percent in the year ended July 31.
May’s comparable sales declined 2.4 percent in 2004 and Federated’s increased 2.6 percent.
“If you are in a department-store business, which is a buggy-whip business, why would you want to buy another buggy-whip company also losing market share?’’ Howard Davidowitz, chairman of the retail consulting and investment-banking firm Davidowitz &
Associates Inc., said in an interview. “If you got some cash, buy a growth business’’ such as Best Buy Co. and other specialty chains away from malls.
The acquisition is the biggest in U.S. retail history if debt is included in the total value, according to Bloomberg data. The deal catapults Federated over J.C. Penney Co. as the No. 2
U.S. department-store company.
In November Troy, Michigan-based Kmart, led by chairman and billionaire Eddie Lampert, announced plans to buy Hoffman Estates, Illinois-based Sears for $11 billion, giving the
combined company about 3,400 stores and $55 billion in annual revenue.
Federated said it’s likely that most of May’s regional chains, such as Hecht’s, Strawbridge’s, Foley’s, will be converted to the Macy’s name. It carries more cachet with consumers partly because of the annual Macy’s Thanksgiving Day Parade, said George Whalin of Retail Management Consultants in San Marcos, California.
“We will be much a stronger, faster-growing company’’ together than separately, Lundgren said Monday. The new company will benefit from May’s locations and be better able to market
merchandise across the nation as well as tailor it to local markets, he said.
The purchase price represents a premium of less than 1 percent over May’s closing price on Feb. 25.
Shares of Cincinnati-based Federated fell 34 cents Monday to $56.45 at 4:04 p.m. in New York Stock Exchange composite trading. They have fallen 1.1 percent since Jan. 19, the day before the Wall Street Journal reported the companies were in talks. St. Louis-based May, which also owns Marshall Field’s and Lord & Taylor, fell 84 cents to $34.51. Shares have risen 10 percent since Jan. 19. The Bloomberg U.S. Retail Index has declined 0.1 percent since then.
Federated, which plans to increase its dividend to $1 a share, will have about $1 billion in purchase expenses to be spread across three years.
Lundgren, 52, said on Feb. 22 that he wouldn’t overpay for acquisitions. Federated will pay May investors $17.75 and 0.3117 shares of Federated stock for each May share.
“It looks like a very balanced price benefiting both sets of shareholders,’’ said New York-based Bill Dreher, an analyst at Deutsche Bank, who rates both companies “hold.’’
“It definitely looks like Federated did not overpay,’’ Dreher added.
The Federated transaction adds to the multibillion-dollar U.S. mergers in the past year that have included Procter & Gamble Co.’s $52.4 billion purchase of Gillette Co., JPMorgan Chase & Co.’s $58 billion acquisition of Bank One Corp. and SBC Communications Inc.’s purchase of AT&T Corp. for $16 billion.
After Federated and May failed to reach a merger agreement a few years ago, the Jan. 14 resignation of May CEO Eugene Kahn made the acquisition easier, Davidowitz said.
The merger comes about two years after Lundgren took over as chief executive at Federated. He’s boosted sales by expanding private brands, including INC International Concepts and Charter Club. Private-label brands have higher margins because the items are ordered directly from manufacturers.
Federated, which owns the Rich’s, Goldsmith’s and Lazarus chains, is also converting 423 regional chain stores to Macy’s by March.
May hasn’t been as successful with its private brands, which include i.e. and Identity, and would benefit from Federated’s merchandising savvy.
“Federated management is superb, with a great plan focused on fashion for the value and new labels and designers,’’ said Deutsche Bank’s Dreher. “The May department-store base would be better utilized by Federated.’’
May’s stores are mostly in Midwestern states including Illinois, Texas, Colorado and Missouri. At the end of fiscal 2004, May operated 491 department stores under the names
including Famous-Barr, Filene’s, Foley’s and Kaufmann’s. It also operates 239 bridal and other specialty stores.
Federated’s more than 450 locations are mostly in more affluent regions on the East and West coasts. The company may have to close or sell about 75 stores because of overlapping
locations, wrote New York-based UBS analyst Linda Kristiansen, who rates May “neutral’’ and Federated a “buy.’’ Twenty-five may be closed in other markets.
Converting May chains to Macy’s will allow Federated to emphasize fashion apparel in national television advertising, said Britt Beemer, chairman of market research firm America’s Research Group in Charleston, South Carolina.
“Macy’s will be basically in every major market in the country,’’ Beemer said in an interview.
May last July bought the Marshall Field’s chain from Target for about $3.2 billion after Federated chose not to pursue a deal. Chief Financial Officer Karen Hoguet said at the time that Federated would be “disciplined’’ in paying for acquisitions.
The merger is the latest in almost a century of consolidation among department-store chains. Federated was formed in 1929 as a holding company for companies including family owned
Abraham & Straus, F&R Lazarus and Filene’s, which is now part of May. It purchased Macy’s in 1994.
May, founded in 1877, created the Famous-Barr chain after acquiring the William Barr Dry Goods Company and The Famous Clothing Store in 1911. The company went on to buy chains
including Hecht’s, Kaufmann’s and Strawbridge’s.
The deal is expected to close in the third quarter.
The combination may get close scrutiny at the Federal Trade Commission should antitrust enforcers decide that department stores constitute a separate retail market, said Robert Doyle, a former FTC official and a Washington antitrust lawyer.
“There are about 100 malls throughout the United States where both a May and a Federated department store are the key department stores,’’ Doyle said. The FTC might require the
companies to sell stores in such malls to preserve competition.
–With reporting by Mindy Spangler, Howard Liberman and Mark Pittman in New York and Jim Rowley in Washington.
