Federated/May Agree to Deal

Discussion
Feb 28, 2005
George Anderson

By George Anderson

Federated Department Stores announced this morning that it has agreed to acquire rival May Department Stores in a deal valued at approximately $11 billion. May shareholders would receive $36.00 for each share they hold.

The deal will make the combined company the largest department store chain in the U.S. with about 1,600 stores operating under the banners of Macy’s, Bloomingdale’s, Marshall Field’s, Filene’s and David’s Bridal.

Count former Federated and J.C. Penney chairman and chief executive Allen Questrom as one of those who believe Federated made the right move with this deal.

“I believe that the Federated team would not have made this move unless they knew they could add value,” he told The Cincinnati Enquirer. “They will be able to bring May back to the profitability that the company had throughout the 1990s, and Federated should be able to bring the profitable private labels to May stores across the nation.”

Howard Davidowitz, chairman of Davidowitz & Associates retail consulting firm, has a different take.

“May has seen shrinking sales of 7 percent, and unless you arrest that decline in one year, you’ve overpaid. Federated has bought a crisis. This is two companies with small market shares, and they’ve not been growing,” he said. “I think of buggy whips. Federated has bought into a shrinking business.”

The deal will have to pass shareholder and regulatory approval before being finalized.

Moderator’s Comment: What will Federated need to do to make a success of its merger with May Department Stores?

Reports suggest Federated intends to help pay for this deal by possibly selling off its credit businesses. The Cincinnati Enquirer report said it
may also consider selling the David’s chain.

A report in The New York Times said analysts such as Oppenheimer & Company’s Bernard Sosnick expect Federated to close as many as 200 underperforming
stores currently operated by May. It may also extend its national branding of Macy’s by putting its banner over stores currently operating under the Famous-Barr, Filene’s, Foley’s,
Hecht’s, Kaufmann’s, Meier & Frank, Robinsons-May and Strawbridge’s names.

“Together, using the Macy’s name, a powerful national franchise could be established,” wrote Mr. Sosnick 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.”

George Anderson – Moderator

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9 Comments on "Federated/May Agree to Deal"


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Mark Hunter
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Mark Hunter
16 years 5 days ago

There is going to be a significant amount of real estate changing hands over the next several years among the major mall operators, REITs and others. This is going to go on apart from all of the re-branding of store names that we’ll see. One short-term loser is Sears/Kmart, as the value of their total property will now decline with even more retail space coming up for grabs. Most significant winners are Target (smart move on their part selling off their department stores) and Kohl’s, as these two are in the best spot in terms of consumer preference to gain market share. J.C. Penney may also win if they stay aggressive with their current women’s branding campaign.

Tom Zatina
Guest
Tom Zatina
16 years 5 days ago

In addition to putting some assets “on sale” to pay for some of the deal, Federated will work hard to make shopping in their stores more fun and rewarding. Frankly, and at a risk of stating the obvious, I think these department stores and their ilk have gotten too predictable, boring and also less relevant as they have lost their hometown roots. Time to introduce some fun.

Carol Spieckerman
Guest
16 years 5 days ago

In terms of product, in softlines, Federated should concentrate on offering quality basics supplemented by limited buys of fast-turning, on-trend fashion (emulating H&M and Zara in terms of trend and more like Anthropologie in terms of limited availability and quality). Since consumer spending has shifted away from apparel and into electronics (which have become “accessories”), they should strategically offer trendy gadgets (hopefully a few short-term exclusives) and, finally, pampering and cosmecuetical services as well.

Ron Margulis
Guest
16 years 5 days ago

I have to wonder if the leverage Federated/May hopes to gain is with suppliers (both branded and private label) or real estate companies. Certainly, consumers will see more private label apparel at the May locations, and Federated’s strength in this area shouldn’t be undervalued. But with more than 1,000 locations, and consolidation heating up in retail and with REITs, the merger should lead to some interesting lease negotiation sessions.

Rick Moss
Guest
16 years 5 days ago
A lot has been said on RetailWire and elsewhere about the need for reinvention in the traditional department store channel. And now, Federated/May effectively IS that entire channel, so it’s going to be up to them. To those who worry that the incentive will go away with the dissolution of the competitive pressure between the two companies, I would say that Federated should be well aware that the real competition comes from elsewhere, i.e. discount and specialty apparel chains. On the plus side, the idea of broadening the Macy’s franchise has great promise. Macy’s is a powerful brand, with deep, emotional roots among Boomers. The challenge, in my mind, therefore, is clearly in making the stores relevant with the younger generations — the ones who see these anchor stores as nothing more than a gauntlet to run on their way to the inner-mall specialty shops like American Eagle, Pacific Sunwear and BeBe. With the future of the department store channel in their hands, I would hope they’ll invest more in future generations of customers, as… Read more »
Art Williams
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Art Williams
16 years 5 days ago

Less competition among mall department stores will be a very bad thing for mall operators and anyone hoping to sell locations such as Sears/Kmart. It should benefit Penney’s and anyone that might be in the market for some good locations at a reasonable price. So many malls were anchored by two department stores that will now be owned by the same company that it will have to make mall operators pretty nervous.

Mark Burr
Guest
16 years 5 days ago
I think the answer is simple. They will, like any other retailer, have to create a ‘reason’ for the customer to return to any one of their now many banners. Or in the end, it will be easier for only one company to handle the consolidation, or should I say, liquidation of an era in retailing that is slipping away before our eyes. Start by naming the product choices for which you might make a trip to the department store. Then, next to each one, name the alternatives today to shopping there versus any one of the alternatives. By doing this, even before finishing the list, it’s easy to see the challenge. The ‘reason’ thing is the answer. And, the answer might lie in the result of the question of the ‘experience.’ The question of the ‘experience’ is ambiguous and subjective to say the least. They might get one chance at it. If they’re very lucky they’ll get a second try. My vote is to gather some very creative people along with some healthy consumer… Read more »
Carol Spieckerman
Guest
16 years 5 days ago

In regard to mall woes, Wal-Mart has already begun their move to the mall as part of their ongoing out-of-the box strategy… perhaps this will accelerate the plan.

Franklin Benson
Guest
Franklin Benson
16 years 5 days ago

The Wall Street Journal is putting some spin on the story as saying that the merger represents a big bet on the continued existence of the Department Store Format. This is really a profound thing – the entire store format as a valid business model is being questioned.

I could see department stores, and the “department store experience” becoming more of a niche thing, and I can see that there is clearly an overcapacity in that niche, but I don’t see the niche disappearing entirely. It’s just getting really crowded.

My spin would be that the merger represents a big bet on the combined company being one of the survivors. Not a thriver, but at least still alive.

I’m reminded of the HP-Compaq merger…

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