Posted on 01/21/2005 5:56:46 AM PST by Brilliant
Two years after merger talks fell apart between Federated Department Stores and May Department Stores, the two largest department store chains in the country, Federated is once again taking a look at May.
Although the two companies have not had any meetings yet, Federated has let May know that it might be interested in picking up where they left off, executives close to both companies said.
In recent weeks, dynamics have changed and prompted Federated's renewed interest. On Friday, May's board ousted Gene S. Kahn, its chairman and chief executive, after almost three years of disappointing sales throughout the chain.
According to retail analysts and investment bankers, the sticking point in the 2002 negotiations was who would emerge as the chief executive. With Mr. Kahn gone, that becomes almost a moot point.
Yesterday, executives close to the board of May, the owner of Lord & Taylor and Marshall Field's, said the board might now be more disposed to listen to a merger proposal from Federated, if one were made. But the executives added that the May Company would get a lot more money in a deal if it had a new chief in place and a turnaround in progress.
"Talk to us in a year," an executive connected with the company said. But analysts say that Federated is ready to move now - on something.
It might settle for a slice of the pie. Federated has long coveted Marshall Field's and might be interested in just that, a retail executive said.
Federated is annoyed about having lost Field's in a bidding war. The chain was sold seven months ago for $3.2 billion, a price that Federated's board considered about $500 million too high, a banker said. Now, with declining store sales and $6.9 billion in debt, May might be willing to sell Marshall Field's for less than it paid - or so analysts speculated yesterday.
There was also speculation among analysts that Federated might move to talk with Saks Inc. While Saks Fifth Avenue, under Fred Wilson's one-year tenure, appears to be in a turnaround with a new team, Saks Inc.'s other stores, including Proffitt's, could be ripe for a deal if Federated cannot get Marshall Field's.
Neither May nor Federated had any comment yesterday.
The industry is watching both companies more closely than usual, as the midmarket department store sector they are part of is being squeezed at both ends. At the high end, luxury emporiums like Neiman Marcus and Bergdorf Goodman, and, to a lesser extent, Saks Fifth Avenue, are recording double-digit increases in sales, as their shoppers display a seemingly insatiable appetite for $3,000 handbags and fur-trimmed tweed jackets.
At the low end, chains like Wal-Mart and Target are creeping more and more into traditional department store domains, like apparel and jewelry. Wal-Mart, analysts say, is now the biggest jeweler in the world.
In response, May has been trying to return its stores, particularly Lord & Taylor, to their upscale roots. The purchase of Marshall Field's was also intended to lift the chain.
For its part, sensing that the battleground for department stores is increasingly on this more luxurious turf, Federated has invested hundreds of millions of dollars in Bloomingdale's, and in the last year, drawn together dozens of stores with a handful of names under the Macy's name nationwide.
If Federated bought May's, it would have a total of 960 stores - and many of them, analysts speculated, will probably have to go.
Nordstrom told Merrill Lynch yesterday morning that "there would be interest in some of the locations that could be for sale if a merger were to occur," according to a report by Virginia Genereux, a Merrill retail analyst.
Federated, under the leadership of Terry Lundgren, has been successful in reducing its debt and is now said to be on the prowl for ways to make the company grow.
Mr. Lundgren has done nothing to stop talk about his plans. At a retail-industry conference in New York on Wednesday, Mr. Lundgren responded to a question about whether he was interested in May by saying, "I think we're supposed to acquire every store in America."
For Federated, fanning speculation may also be a particularly clever negotiating tactic: With the possibility of a takeover, May will have a harder time recruiting a new chief executive.
Federated perhaps hopes that shareholders' reaction to articles like one in The Wall Street Journal yesterday will put pressure on May's board to decide to come to the negotiating table. The newspaper reported that preliminary merger talks had begun, although no meetings had taken place, according to executives in both companies. Nevertheless, the report caused May's shares to rise $2.88, or 9.2 percent, to $34.25. Last Friday, the day Mr. Kahn left, May's shares rose 15.7 percent.
Mr. Kahn, hailed as a great merchant when he ran May's G. Fox & Company, a store chain based in Hartford until the early 1990's but now defunct, has been under scrutiny for the last several years. Analysts predict that when May's earnings are released in February, this will be the third year that May reports negative same-store sales, in what they say will be the worst performances of any department store chain in America.
After Mr. Kahn left, analysts put out reports debating the merits of a Federated-May merger.
The chief argument against it, some said, was in the antitrust implications. "The bigger issue is if the Federal Trade Commission would allow a transaction of this size to occur, given the overlap between the two retailers," Merrill Lynch said in its report yesterday. Although the store locations dovetail pretty well in the East and Midwest, analysts and bankers say there are overlaps, particularly in California, that would present problems.
Gilbert W. Harrison, chairman of Financo, an investment banking firm based in New York, questioned whether the $17 billion value of May, plus any sweeteners that May might demand, would be worthwhile for Federated.
Just to make a deal based strictly on stocks, he added, might not be a good deal. "To buy it for cash and stock - to add more debt to Federated after Terry has worked so hard over the last three years to reduce it, and to create a national brand in Macy's - is questionable," he said.
On Friday, May's board ousted Gene S. Kahn, its chairman and chief executive, after almost three years of disappointing sales throughout the chain...
According to retail analysts and investment bankers, the sticking point in the 2002 negotiations was who would emerge as the chief executive. With Mr. Kahn gone, that becomes almost a moot point....
The fact that the orginal deal fell apart over the question of who would be the CEO is, in my view, an indictment of American corporate culture. If the merger made sense, the question of who gets to be boss ought not stand in the way. We need better shareholder control over companies. Management simply has too much power, and forgets that it is working for us, the shareholders.
The merchandise in both stores has gone down, imo.
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