CINCINNATI -- Federated Department Stores, Inc., headquartered in New York and Cincinnati, has entered into an agreement with The May Department Stores Co., St. Louis, whereby Federated will acquire May.
While no division consolidations or store name changes are planned before 2006, Federated said it is likely that most of May's regional department stores ultimately will be converted to Macy's.
The stock deal amounts to approximately $11 billion in total equity value. In addition, Federated will assume May Co. debt of approximately $6 billion for a total price tag of approximately $17 billion.
The result will be a national department store chain with over 950 stores and $30 billion in sales. Federated is the parent of Bloomingdale's and Macy's. May Department Stores owns Marshall Field's, Lord & Taylor, Famous-Barr, Kaufman's, Foley's, Filene's, Hecht's and other department stores as well as several bridal chains.
Last year, Federated had sales of approximately $15.6 billion in 458 stores. May had $14.4 billion in sales in 501 locations. (May Co. also operates nearly 700 bridal wear stores under several names)
Pursuant to the transaction, each share of May will be converted into the right to receive $17.75 per share of cash and 0.3115 shares of Federated stock.
As part of this transaction, Federated has committed to increase its annual dividend to $1 per share.
The deal, which was approved by the boards of directors of both companies, will establish Federated as a $30 billion national retailer whose economies of scale and scope of operations will enable it to compete more effectively in the highly competitive retail sector, according to Federated.
"This is truly an exciting day in American retailing," said Terry J. Lundgren, Federated's chairman, president and chief executive officer. "Today, we have taken the first step toward combining two of the best department store companies in America, creating a new retail company with truly national scope and presence."
The merger underscores the highly competitive nature of today's retail scene.
"In today's retail environment, competition comes from every conceivable retail format. To succeed, we have to operate more efficiently and compete more effectively against players at all levels of the retail demographic," said John Dunham, May's president and acting chairman and chief executive officer. "There is no question that this is a bold and exciting move, and one I believe will have a positive impact on competitive retailing for American consumers in the longer term."
Completion of the deal is contingent on regulatory review and approval by the shareholders of both companies, a process that is expected to take several months. The transaction is expected to close in the third quarter of 2005.
Branding Strategies
Discussing the likely change of the May Co nameplate to Macy's, Lundgren noted that re-branding of the various Federated stores has been successful. Beginning two years ago, Federated's regional operations Bon Marche, Burdine's. Goldsmith's, Lazarus and Rich's have changed their nameplates to Macy's.
"We have had considerable success in re-branding our own regional stores as Macy's, so obviously we anticipate continuing this strategy to some extent with our new stores," said Lundgren.
"Operating regional stores primarily under one brand means we can advertise nationally, unlike regional retailers, which is more cost-effective. It also means that cause-marketing programs such as Macy's 'Go Red for Women' campaign, which benefits the American Heart Association, can be promoted nationally, making them more impactful for the causes they benefit."
Synergies
Once the merger is consummated, Federated will operate more than 950 department stores, along with approximately 700 bridal and formalwear stores. In addition, 15 new states, mostly in the nation's heartland, will be layered onto Federated's existing 34-state operating base, with relatively little overlap between the companies' locations, according to Federated. "As a result, Federated for the first time will have a national retail footprint, with stores in 64 of the nation's top 65 markets," the company said.
Lundgren said that this transaction is expected to be accretive to Federated's earnings per share in 2007. He explained that Federated expects to realize approximately $450 million in cost synergies by 2007, resulting from the consolidation of central functions, division integrations and the adoption of best practices across the combined company. In addition, the company anticipates approximately $1 billion in one-time costs related to the acquisition and integration, spread out over a three-year period beginning in 2005.
Federated said that while it intends to merge May's St. Louis corporate headquarters functions into its own Cincinnati and New York corporate offices, beginning this year, its intention is to make St. Louis the headquarters of one of the major operating divisions going forward in order to take advantage of the considerable talent pool that exists there. Federated also said it intends to honor May's extensive philanthropic commitments to the communities in which it operates, and to continue that practice.
Benefits to Consumers
Among the benefits to customers arising from the acquisition, Lundgren cited the capacity to lower costs through synergies, the ability to engage in national marketing initiatives, the potential to expand the private brand merchandise lines of both companies, a rollout of Federated's successful reinvent initiatives to May's department stores, and the ability to expand customer loyalty programs and offer bridal and gift registries to a national customer base.
"For the customers of both companies, joining together means we will be better able to offer value and an improved retail experience, from better assortments and merchandise selections to more competitive pricing and service," Lundgren said. "For shareholders and employees, joining together means we will be better able to meet competitive challenges in the retail marketplace and better able to realize growth opportunities over the longer term. And for the communities we serve, joining these companies together means additional opportunities for cause-marketing promotions and expanded involvement in initiatives that facilitate our giving back in a meaningful way to the places our customers and employees live and work."
Lundgren said the combination of the two companies is expected to lead to accelerated same-store sales growth. "We expect the sales of the combined company to grow faster as a result of certain changes we would make, including introducing the best of Federated's and May's private brands into each other's stores and rolling out our reinvent initiatives to May stores."
"It will take us until mid-2007 to implement all of the changes we would anticipate as a result of this acquisition, and we intend to take the time necessary to do it right," Lundgren said. "Our first priority is to continue to execute in all of our stores this year, while we focus behind the scenes on consolidating corporate and support operations."
About Federated:
Founded in1929, headquartered in Cincinnati, OH, with corporate offices in Cincinnati and New York.
Federated currently operates more than 450 stores in 34 states, Guam and Puerto Rico under the names of Macy's, Bloomingdale's, Bon-Macy's, Burdines-Macy's, Goldsmith's-Macy's, Lazarus-Macy's and Rich's-Macy's. The company also operates macys.com and Bloomingdale's By Mail. Federated is converting all regional department stores to Macy's brand effective March 6, 2005.
Employees: 111,000
Annual sales: $15.6 billion.
About May:
Founded 1910, headquartered in St. Louis, MO. At the end of fiscal 2004, May operated 491 department stores under the names of Famous-Barr, Filene's, Foley's, Hecht's, Kaufmann's, Lord & Taylor, L.S. Ayres, Marshall Field's, Meier & Frank, Robinsons-May, Strawbridge's, and The Jones Store, as well as 239 David's Bridal stores, 449 After Hours Formalwear stores, and 11 Priscilla of Boston stores. May currently operates in 46 states, the District of Columbia, and Puerto Rico.
Employees: 132,000
Annual sales: $14.4 billion.