May Department Stores Co. has beaten arch rival Federated Department Stores Inc. in the battle to acquire Target Corp's Marshall Field's unit, but analysts say the Lord & Taylor stores owner may be overpaying.
The $3.24 billion deal, announced late on Wednesday, is likely to help May expand its geographic presence, gain more leverage in negotiating with vendors and add scale to better compete against Federated, but analysts questioned the price-tag.
Carol Levenson, an analyst with credit research firm GimmeCredit, said, "By virtually any standard, except the modest promised earnings accretion, this acquisition is bewildering" and could hurt May's credit rating.
"Based on a much lower price, we had projected this combination would possess mid-BBB credit quality, and unless we hear some heroic plans for debt reduction from management, we would now view May as a weak-BBB credit," she said.
Levenson added in a research note that in buying a department store chain similar to its own, May was doing little to shield itself from risks inherent in the department store business.
Robert, Buchanan, an analyst at A.G. Edwards, said in a note to clients, "We'd have preferred May had paid less for this asset," considering the work that is needed to turn around the underperforming Marshall Field's.
He also said the deal comes amid May's "diminishing earnings outlook," as rising interest rates are expected to cool consumer spending.
Levenson estimated that May could be paying "an astonishing" 15 times estimated 2003 earnings before interest, taxes, depreciation and amortization for Marshall Field's.
"We are guessing May bonds won't cheapen sufficiently today to be compelling buys," she said.
Emme Kozloff, an analyst at Sanford C. Bernstein & Co. LLC, said she had estimated the value of Marshall Field's at closer to $2 billion, but the price may have been pushed higher by an intense bidding war between May and Federated, as well as cost savings May anticipates.
"The $3.24 billion price-tag is higher than our original expectations and is a major positive for Target but will likely require a major justification from May," she said in a note.
The deal is expected to be completed in the next five months.