Federated Department Stores Inc. plans to double its size by acquiring May Department Stores Co. in what amounts to an $11 billion bet that department stores have a future even as consumers increasingly shop at discounters and specialty stores.
“We believe passionately that department stores have a very important place in the ever-forming, ever-changing retail environment,” Terry J. Lundgren, Federated’s chairman, president and chief executive said Monday in announcing the cash-and-stock deal.
Many of May’s department stores eventually will be converted to the Macy’s name as Federated accelerates its strategy of creating a nationwide brand that would give it pricing leverage with suppliers. The transaction also would bring together the operator of Bloomingdale’s with May’s Marshall Field’s, Lord & Taylor and Hecht’s chains.
Federated would not say how many jobs will be cut or what the company would do in cases where it would control multiple department stores in malls. Analysts at Smith Barney estimates that 94 malls have stores with Federated and May nameplates.
The company wants to hear what regulators say about whether and how many of the overlapping stores will have to be closed or sold, Lundgren said at a news conference in New York.
The combined company would have about 950 department stores and an additional 700 bridal and formal wear stores. It would operate in every state except Alaska, along with Guam, Puerto Rico and the District of Columbia.
Finding a younger crowd
Department stores have been losing sales in part because young people regard them as the places where their parents shopped, retail industry analyst Kurt Barnard said.
He said Lundgren has driven Federated to reach out to young people with merchandise that appeals to them, an approach that Federated can use for May’s stores.
“It is working,” Barnard, the president of Barnard’s Retail Consulting Group, said from Nutley, N.J. “We are seeing younger people flocking to the (Federated) department stores.”
Still, Federated could face a big challenge in revitalizing May, whose sales have slipped, according to Bob Buchanan, an analyst with A.G. Edwards & Sons Inc. “It is not going to be easy to turn that around,” he said.
Federated already is spreading the Macy’s name to its regional department store groups, meaning that names including Lazarus, Rich’s and Burdines will disappear this month.
Lundgren said Federated doesn’t plan to change May store names before 2006, but then will rename its stores — and even some Bloomingdale’s stores — as Macy’s. That means that May store names including Filene’s, Foley’s, Hecht’s and Kaufmann’s could disappear next year.
The extension of the Macy’s name takes advantage of its fame and also will allow Federated to expand use of Macy’s credit cards and become a national advertiser, Lundgren said. The combined company will be in the nation’s top 65 markets except Jacksonville, Fla.
The merger is the latest consolidation in the department store industry, particularly the mid-tier sector as companies seek to reduce total advertising spending and other costs while gaining bargaining power with suppliers. Just last November, Kmart Holding Corp. agreed to buy Sears, Roebuck & Co. for $11.5 billion.
More deals expected
And there may be more dealmaking in the offing. Saks Inc. may sell or spin off its middle-market department store division to concentrate on its Saks Fifth Avenue unit, which targets the luxury market, one of the hottest areas in retailing. It is expected to make a decision in a few weeks.
Federated’s takeover of St. Louis-based May is subject to regulatory and shareholder approval. The companies hope to close the deal in the third quarter this year.
Federated said it expects the merger to improve profits beginning in 2007. The company said it anticipates $450 million in cost savings by 2007 from combining purchasing and other central functions, integrating divisions and adopting best practices from both companies.
Federated said it expects one-time merger costs of about $1 billion, to be spread over three years starting in 2005.
Under the deal, each share of May will be converted into the right to receive $17.75 per share in cash and 0.3115 shares of Federated stock. Based on the 10-day trading average of Federated stock as of last Friday, that equates to $35.50 per share, or $11 billion.
Federated said it will assume May debt that totaled about $6 billion at the end of 2004.
May shares fell 95 cents, or 2.7 percent, to $34.52 in late afternoon trading on the New York Stock Exchange. Its stock has been rising in recent weeks in anticipation of a deal. The stock has ranged in price from $23.04 to $36.48 during the past year.
Federated shares initially rose $1.21 to $58 in trading Monday morning, but by late afternoon they fell 79 cents, or 1.4 percent, to $56. Federated has traded between $42.80 and $59.91 the past year.
Federated said it plans to merge May’s St. Louis corporate headquarters functions into Federated’s Cincinnati and New York corporate offices, beginning this year. But, Federated said it will make St. Louis the headquarters of one of the combined company’s major operating divisions, to take advantage of the talent pool there.
Federated has annual sales of $15.6 billion and 111,000 employees. It operates more than 450 stores in 34 states, Guam and Puerto Rico under the names Macy’s, Bloomingdale’s, Bon-Macy’s, Burdines-Macy’s, Goldsmith’s-Macy’s, Lazarus-Macy’s and Rich’s-Macy’s. The company also operates macys.com and Bloomingdale’s By Mail.
May has 132,000 employees in 46 states and annual sales of $14.4 billion. The company operates about 490 department stores under the names Famous-Barr, Filene’s, Foley’s, Hecht’s, Kaufmann’s, Lord & Taylor, L.S. Ayres, Marshall Field’s, Meier & Frank, Robinsons-May, Strawbridge’s and The Jones Store. The company also has 229 David’s Bridal stores, 458 After Hours Formalwear stores, and 11 Priscilla of Boston stores.