Macy gives cool reception to suitor

January 04, 1994|By Ian Johnson | Ian Johnson,Macy FEDERATED FederatedNew York Bureau

NEW YORK -- This was the way it was supposed to work: Quick and clever Federated Department Stores Co. was to use some fancy financial footwork to sidle up to retailing's damsel in distress, R. H. Macy & Co.

Knowing that Macy was having its laundry aired in court, Federated would offer a quick way out of bankruptcy by proposing marriage. Prodded by the court, Macy would then give up its 136 years of independence and the two would marry.

But after approaching Macy over the weekend, Federated got a frosty reception yesterday from its potential bride. The companies' chairmen met in New York, but few words were exchanged in a 30-minute meeting that people close to the talks said was closer to a "monologue" -- with Federated laying down the rules of an arranged marriage -- than a heart-to-heart talk between two lovers.

"Macy's is not too thrilled about being gobbled up by Federated," said Peter Schaeffer of Johnson Redbook Service, which tracks the retail industry.

Alan Millstein of Fashion Network Report added: "The chances of this happening as advertised -- that it would create the nation's largest retailer -- are about zero. There are too many problems right now."

Yesterday's meeting came after Federated announced Sunday that it had quietly spent $449.3 million to buy half the Macy debt held by Prudential Insurance Co., which is Macy's largest creditor. Federated also holds options that allow it to buy the rest of Macy's debt from Prudential.

Because Macy is in bankruptcy court, owning a big chunk of Macy's debt could give Federated a say in strategies that Macy pursues as it tries to climb out of bankruptcy and in any final negotiated settlement between Macy and its creditors.

Federated chief executive Allen I. Questrom called Macy chieexecutive Myron E. Ullman III with the news Sunday, and the two agreed to meet yesterday in Macy's flagship store in midtown Manhattan.

Prior to the meeting, in a conference call with financial analysts, Federated officials said they wanted a friendly deal with Macy, said Kim Golden, manager of T. Rowe Price's Recovery Fund. "Macy's has every reason to discuss this with them, and Federated said it went well," Mr. Golden said.

A Federated spokeswoman said later in the day that Mr. Ullman had been "open" to Federated's proposals, but Macy canceled a planned statement about the meeting. Instead, officials issued a dry statement coolly reiterating that Federated's move "has not altered Macy's ongoing actions to develop its own plan of reorganization."

Macy, which operates 111 stores under the Macy's and Bullock's names, has operated under Chapter 11 bankruptcy protection for two years. As part of cost-cutting, it has closed a dozen stores, including the Macy's store at Hunt Valley Mall and the company's I. Magnin store in White Flint Mall in Kensington.

These closings have helped stanch losses of $544 million in its 1993 fiscal year, which ended July 31. That compared with losses of $1.3 billion in 1992.

But the company still owes nearly $6 billion in debt, stemming from a 1986 buyout of the company that took it private at a cost of $3.58 billion. It later added to its problems by fighting Campeau Corp. of Canada for Federated. Macy failed to buy all (( of Federated, but spent $1.1 billion acquiring Federated's Bullock's and I. Magnin stores in California.

Federated, the nation's second-largest department store chain with $7.1 billion in annual sales, has 219 stores in 26 states including Abraham & Straus, Bloomingdale's, Bon Marche, Burdines, Goldsmith's, Jordan Marsh, Lazarus, Rich's and Stern's.

A Macy and Federated merger would create a company with $13.8 billion in annual sales -- compared with $11 billion for the current retailing champ, May Department Stores Co., which owns 312 stores in chains such as Hecht's, Lord & Taylor, Filene's and Foley's.

Advantages of a merger could include strengthened purchasing power and lower overhead costs, said Kurt Barnard, president of Barnard Retail Consulting Group. "It makes a lot of sense. They could be a real powerhouse."

But as industry observers crunch numbers and analyze the two companies, they say that the chances of this happening are slim.

The most obvious problem is opposition from Macy's own executives. The company assembled a team of ambitious and successful top managers -- including one that it stole from Federated -- and would probably be unwilling to submit to Federated's Mr. Questrom, said Mr. Schaeffer of Johnson Redbook.

On top of that are antitrust considerations. If the two merged, they would dominate retailing in Atlanta, New York City and south Florida, a situation that would attract scrutiny from federal regulators.

Indeed, Sen. Howard M. Metzenbaum asked federal officials yesterday to determine whether a merger of Federated and Macy could hurt competition in the retailing industry, the Associated Press reported.

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