Big retailers seen near $10.4b merger
Federated purchase of May could lead to end of Filene's name
By Chris Reidy, Globe Staff | February 28, 2005
Federated Department Stores Inc. plans to pay $10.4 billion to buy rival May Department Stores Co., according to published reports, in a deal that could mean the eventual disappearance of the Filene's name from the New England marketplace.
Federated, which owns such retail chains as Macy's and Bloomingdale's, aims to gain size and win back consumers who have defected to a wide range of other stores, including Target Corp. and specialty chains. Aside from Filene's, May also runs Lord & Taylor, Marshall Field's, David's Bridal, and other chains. (Filene's Basement, part of a different company, is not involved in the deal.)
The combined company would be a retail behemoth, with about 1,000 stores and $30 billion in annual sales. A deal would be the latest merger in a consolidating industry hit hard by discounters like Wal-Mart Stores Inc. and Target at the low end, by luxury chains such as Neiman Marcus and Coach at the high end, and by the Internet.
The boards of both Federated and May have approved the transaction, which is expected to be announced today, according to reports last night.
The companies could not be reached for comment.
If the deal is approved by government regulators, it could mean the end of the Filene's name, said John Macht, a former Macy's executive who heads a Boston-area retail consulting firm called the Macht Group.
Filene's, which has just under 50 stores, mostly in New England, and the larger Macy's chain are so similar in their merchandising that it makes little sense to operate them as separate brands over the long term, Macht said.
''But it won't be immediate," he said. ''It will happen slowly over a period of several years."
That's what is happening with Federated's regional chains, which will soon bear only the Macy's name.
Analysts expect store closings to be part of the May-Federated consolidation, and to result in layoffs. Together, the companies employ about 169,000 workers nationwide. Closings are most likely at malls where both Federated and May operate stores. There are 101 malls that have both a Federated store and a May store as an anchor tenant, according to a Citigroup research report.
''You are about to witness not only the changing of the retail landscape but also the changing of the mall landscape as well," said Marshal Cohen, chief analyst for the NPD Group, a market research firm.
Once department stores dominated the retail landscape. But over time competitors on all sides whittled away their sales. And consumers are shopping more at places like Target and at strip malls. Department stores have also lost much of their distinctiveness, stuck in the middle between discounters and specialty shops.
Meanwhile, other retailers were growing much larger. Last year, Cincinnati-based Federated had sales of $15.6 billion, and St. Louis-based May had sales of $14.4 billion. Wal-Mart Stores Inc. had sales of $285 billion, and Target sales of $46.8 billion. Seeing the trends, Sears Roebuck & Co. and Kmart Corp. last year said that they plan to merge to become the third-largest US retailer, behind Wal-Mart and Home Depot Inc.
The acquisition of May by Federated would give the latter more buying power with vendors, while combining operations would bring greater operating efficiencies, analysts and consultants said. The deal is also likely to save on administrative and advertising costs, they said.
''You can't be a weak player today," said Jerry Socol, a Boston-area retail consultant who was chief executive of Filene's during the 1980s. ''It's survival of the fittest."
Sources, who spoke on condition of anonymity because the deal has not yet been announced, said the companies' boards approved an agreement over the weekend after days of often contentious negotiations over how much Federated would pay for May, according to The Washington Post. Sources said the two sides agreed Federated would pay $35 to $36 for each May share, in a mixture of Federated stock and cash. May shares, which had been rising on reports of a possible acquisition, closed at $35.35 Friday.
Federated's chief executive, Terry J. Lundgren, is expected to lead the combined company. The two companies discussed merging in the past, but talks broke down over several issues, including who would serve as chief executive. That issue disappeared in January, when May ousted chairman and chief executive Eugene S. Kahn.
The $10.4 billion price suggests May was a willing seller, Bill Dreher, a retail analyst at Deutsche Bank Securities Inc., told the Post. Over the next three years, he said, the merger will generate $400 million to $500 million in cost savings for the two companies through the elimination of overlapping departments such as marketing and distribution.
Retail analysts also expect Federated to cut administrative positions across May's divisions to reduce costs. ''You wouldn't need two buyers to deal with Ralph Lauren," David E. Griffith, an analyst at Tradition Asiel Securities Inc., told the Post.
Federated, which struggled in the late 1980s after becoming the target of a debt-financed takeover, has emerged as a retail powerhouse over the past five years.
Lundgren is widely credited with the chain's success. Since his appointment in 2003, he has expanded the chain's move into high fashion and introduced customer-friendly touches like self-service scanners and prominent signs to speed up shopping.
May has struggled to keep pace, falling behind Federated in developing in-house apparel brands and sprucing up its stores.
''May focused on profit, and Federated focused on fashion. And Federated won," Dreher said.
For 2004, Federated's same-store sales, a crucial measure of a retailer's health, grew 2.6 percent, compared with a 2.4 percent drop at May.
Analysts predict Federated will replace May's private-label clothing lines, sold under names such as Ideology and IE, with those from Federated. Federated's private labels, INC and Charter Club, have become bestsellers and respected names in fashion.
Federated has made no secret of its desire to operate a national department store chain under the Macy's name, arguing the brand -- captured in films like ''Miracle on 34th Street" and promoted in events like the annual Macy's Thanksgiving Day Parade -- is more prestigious than those of its regional department store chains.
Chris Reidy can be reached at
reidy@globe.com. Material from Globe wire services was used in this report.
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