Federated to buy May stores for $11 billion

Long-anticipated deal to be announced today

latest in merger trend


Federated Department Stores, which owns Macy's and Bloomingdale's, agreed yesterday to buy May Department Stores, owner of Lord & Taylor and Hecht's, for about $11 billion, executives involved in the negotiations said.

The deal, which is expected to be announced today, would transform Federated, the nation's largest department store company, into a retailing giant with more than 1,000 stores and $30 billion in sales.

The transaction is the latest merger in an industry that is rapidly being redrawn as traditional department stores face mounting pressure from rivals on all sides: discount giants such as Wal-Mart and Target, specialty stores such as Gap and Victoria's Secret, and upscale retailers such as Neiman Marcus and Nordstrom. Late last year, two other famous names in retailing, Kmart and Sears, Roebuck and Co., agreed to merge in an $11 billion deal.

Some retail and fashion executives lament that such consolidation has left the industry devoid of department stores that were once landmarks, such as Gimbels in New York, Bullock's in Los Angeles and Wanamaker's in Philadelphia. Lost too, the executives suggest, are the industry's personal touches like its "merchant princes" - buyers for department stores who traveled the country spotting the Ralph Laurens and Calvin Kleins before they were household names.

And even more retail mergers may be in the making. Wall Street analysts and fashion industry specialists alike have been buzzing in recent weeks about the deal prospects for Saks Fifth Avenue and Neiman Marcus. Fortunoff and Barney's were sold last year.

Federated's deal with May was a long time in the making. More than two years ago, the companies held talks but failed to reach an agreement after a dispute over which executives would run the combined company. Last month, May's chief executive, Gene Kahn, was ousted by the company's board, which created an opening for Federated to resume negotiations.

The companies have been negotiating off and on for several weeks, the executives said, and a deal was approved by both company boards over the weekend.

The deal is subject to approval by regulators, who are not expected to block the transaction, but may press Federated to sell stores in cities in which it has a strong presence.

Analysts predict that Federated, based in Cincinnati, will probably close a significant number of May's underperforming locations, perhaps as many as 200 stores. Federated may also rename many of May's regional stores Macy's. Besides Lord & Taylor and Marshall Field's, which are expected to go untouched, May owns Famous-Barr, Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Robinsons-May and Strawbridge's, among others.

"Together, using the Macy's name, a powerful national franchise could be established," Bernard Sosnick, an analyst at Oppenheimer & Company recently wrote in a note to investors. "This, we believe, is the compelling force behind a possible merger between the two, along with cost reductions due to the elimination of redundant activities."

Thousands of layoffs are also expected, although other merchants, including Kohl's, JC Penney and Nordstrom, are reportedly lining up to take over some of the locations that Federated may jettison.

May, which is based in St. Louis, is expected to keep some offices there, but there will be layoffs.

Spokeswomen for Federated and May declined to comment.

While some analysts worry that the deal is marrying two dying companies, Terry J. Lundgren, Federated's chief executive, has received high marks for being a disciplined executive, refusing to overpay for acquisitions. When Marshall Field's came up for sale in the past year, he walked away and let May buy it when he thought the asking price had become too high.

And in his negotiations to buy May, Lundgren was similarly tough. While May's board had been holding out for more than $40 a share, he was able to talk them into selling for $35.50 a share in cash and stock, executives involved the process said. Shares of May closed Friday at $35.35. Federated is also expected to assume about $6 billion in debt. May was in a tough position, analysts say, but there were no other natural buyers.

The new company is expected to wring hundreds of millions of dollars in savings, which Lundgren is expected to outline today in a news conference.

Lundgren has also received high marks for imposing an innovative streamlining on his 459-store chain since he took over the company two years ago.

He is pushing to increase the amount of creative private-label fashions, a way to allow stores to differentiate themselves from all the other chains and discount stores.

Some analysts suggest that Federated's history as a product of mergers - the name, after all, means consolidation - will help it as it integrates May.

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