Proffitt's Inc. buys Saks for $2.1 billion Ala. department store chain to change its name to Saks Inc.

330 stores in 38 states

Sale reportedly due to pressure from Bahraini investors



NEW YORK -- Saks Fifth Avenue, one of the most venerable names in retail, said yesterday that it would be acquired for $2.1 billion by Proffitt's Inc., a Southern retailing company.

The proposed deal would represent the end of an era for Saks, whose founders, Horace Saks and Bernard Gimbel, probably never imagined that the famous store on natty Fifth Avenue would one day be part of a retail conglomerate based in Alcoa, Tenn.

Since Saks was founded in 1924, it has undergone several changes of ownership, managing to escape the fate of many famous New York stores. It avoided extinction, unlike B. Altman and Gimbel's, and it was not swallowed up by a giant retail company, as was Macy's when it was acquired by Federated Department Stores.

For shoppers on Fifth Avenue looking for the latest Gucci shoe, the change of ownership will not be noticeable, but those living in the Midwest, where some of Saks' less profitable stores are, may see a different name above the door. And some of Proffitt's stores may change their name to Saks. In fact, Proffitt's will rename itself Saks Inc., seeking some of the glamour of the famous name.

"There is just one Saks Fifth Avenue, and the power of the brand is exactly where retail is going," said Robert Bradley Martin, Proffitt's chief executive, who will be the chairman and chief executive of the new company.

The merger serves as a near-exit strategy for the largest shareholder of Saks Holdings Inc., the Bahrain-based investment company Investcorp International, which bought the retailer for $1.6 billion in 1990 and had been hoping in recent years to make a killing the way it did with other luxury investments like Tiffany & Co. and Gucci Group.

Although the bank initially sold 20 percent of Saks to the public in 1995 for $425 million and followed up with another stock offering, it now finds itself and its clients not cashing out as they had hoped, but rather holding 12 percent of Proffitt's.

Still, based on Thursday's closing stock prices, Investcorp and other shareholders in Saks now own stock worth about 15 percent more than last week, assuming shareholders of both companies approve the deal.

On the surface, Proffitt's does not seem to be the best match for Saks. Proffitt's runs 234 stores that serve middle-income shoppers in the South and Midwest with names like Proffitt's, Younkers, Carson Pirie Scott, and Herbergers. Most of the stores resemble Macy's in terms of what they sell -- lots of Tommy Hilfiger, Liz Claiborne, Nine West and Estee Lauder.

Saks has the opposite strategy at its 96 stores nationwide. Many of the brands that Proffitt's specializes in were evicted from Saks two years ago in an effort to give the retailer a tonier image. Its staples are Gucci, Oscar de la Renta and Yves St. Laurent, all names not carried even in Proffitt's most upscale store, Parisian.

"In terms of merchandise synergies, there are none," Martin admitted. "But we'll buy telecommunications, transportation, paper supplies and other things at an enormous cost savings. This deal is not built on merchandise synergies."

Proffitt's, which was founded in 1919 with a handful of stores in Knoxville, Tenn., has built its fortunes on the success of acquisitions. In the last three years, it has acquired a dizzying seven names, including Carson Pirie Scott in the Midwest, and has slowly built up a portfolio, creating $3.5 billion in revenue. As a result of the acquisitions, sales and profit margins have risen smartly as expenses have become lower.

While the company was attracted to operational cost savings with the Saks acquisition, it is also eager to tap into the Saks fashion savvy that has been lacking at Proffitt's.

The new company will form a product-development unit that will build up private-label programs for all the divisions. Saks already has a strong variety of private-label brands, and Proffitt's has said that it wants 12 percent of its merchandise to be private label.

Also, the two stores now have access to each other's geographic regions. Expanding on both coasts, for example, "would be a good supplement to what Proffitt's does in the Midwest," said Isaac Lagnado, a retail consultant in New York.

Other plans for the new company include greater international use of the Saks name, an increase in the number of domestic stores, and an expanded use of the database of Saks credit-card holders and catalog shoppers.

After the merger, the new Saks Inc. will have its headquarters in Birmingham, Ala., where Proffitt's Inc. recently moved. Saks Fifth Avenue, meanwhile, will be run -- more or less independently from the company's other divisions -- by its current management team out of New York.

Based on Thursday's closing stock prices, each share of Saks would be worth about $33.36; the stock closed last week at $29, up $1.625. That 15 percent premium, however, is likely to change as Wall Street reacts today to the deal.

Pub Date: 7/06/98

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