MINNEAPOLIS -- Dayton Hudson Corp. revealed yesterday that it rejected a $6.82 billion buyout proposal from J.C. Penney Co., adding pressure on the retailer to improve its results or be forced to consider a sale.
The retailers haven't talked since February, when Dayton Hudson's board unanimously rejected the unsolicited stock-and-cash proposal of $90 to $95 a share. Dayton Hudson stock has since jumped 22 percent, closing yesterday unchanged at $92.625.
"This offer ups the pressure to deliver results and focus on their overall game plan," said analyst Thomas Buynak at Society Asset Management, which owns 1.2 million Dayton Hudson shares. "If they don't deliver in the next two or three quarters, then I would say sell [the company] to someone else."
The Minneapolis-based company has been expanding its Target discount chain, but earnings have been dragged down by its struggling mid-priced Mervyn's chain. Also, sales have been sluggish at its department stores, which include Marshall Field's.
Dayton Hudson would make an attractive takeover mark, mostly because of the huge growth potential at its 688-store Target chain, which provides almost two-thirds of its sales and profits, analysts and investors said.
A combined Dayton Hudson and J.C. Penney, the nation's fourth- and fifth-largest retailers, respectively, would have had about $44 billion in sales and 2,300 stores -- ranking it only behind Wal-Mart Stores Inc. in sales.
The rise in Dayton Hudson's shares outstrips the 7.5 percent gain in the S&P general retail store index and the 1.3 per-
cent decline in the S&P 500 index.
The offer, which was for half cash and half stock, was first reported in the Minneapolis Star Tribune, which cited a letter between the heads of the firms.
"The best interests of the company and its shareholders will be served by Dayton Hudson remaining independent and pursuing existing strategies with all three divisions," it said in response to the report. It declined to comment further.
J.C. Penney's offer was too low to be seriously considered, investors said.
"We felt the fair value of the company was much higher," said Barbara Bowles, chief investment officer of Kenwood Group, which held 62,250 Dayton Hudson shares at year-end.
Dayton Hudson has struggled with weak sales the past year, resulting in a 14 percent drop in fiscal fourth-quarter earnings.
The biggest problem is its 297-store Mervyn's chain, whose operating profit fell by more than half last year to $100 million. For months there's been speculation that Dayton Hudson would shed Mervyn's after efforts to spruce up the chain have failed.
The retailer has said it's aiming for a 200 basis point improvement in margins by the end of the year for Mervyn's, said Mr. Buynak. If that doesn't happen, he said the company plans to implement "Plan B," which he expects could be a Mervyn's sale.
Dayton Hudson also has had weak sales at its 64 department stores, which has spurred talk it would sell the stores. That's not likely to happen though, analysts said, since the chains provide a stream of cash flow used to finance Target's rapid expansion.
Also, the upscale image of the department stores helps sales of apparel at Target, said Saul Yaari, an analyst at Piper Jaffray.
Target's sales have been robust, outperforming its rivals. In March, its same-store sales rose 12 percent, while Wal-Mart's sales rose 5 percent and Kmart Corp.'s sales dipped 0.5 percent.
Pub Date: 4/26/96