Federated bets on malls

Mergers, Acquisitions and TakeoversCompanies and CorporationsMarshall FieldMacy'sAdvertisingAntitrust IssuesOld Orchard Mall

In a deal to create a department store giant that will control the anchor positions at malls across the country, Federated Department Stores Inc. on Monday officially announced an acquisition of May Department Stores Co.

The $11 billion deal for May, which purchased Marshall Field's last spring for $3 billion, will create a company with about 950 department stores that will have a presence in every state--except Alaska--and in 64 of the nation's top 65 markets--save Jacksonville, Fla.

The size and scope of the new retailer will help it squeeze out costs from suppliers, reduce overhead and further a plan to roll out key brands--including the Macy's and Bloomingdale's nameplates--to a broader swath of the country.

The new Federated still will be dwarfed by Wal-Mart Stores Inc., which has 3,500 stores nationwide, and even the new Sears Holdings Corp., the department store chain that will be created when Kmart Holding Corp. and Sears, Roebuck and Co. complete their merger.

The new Sears also will have about 3,500 stores--including Kmart outlets, about 870 Sears' mall locations and 1,100 specialty stores--but the direction of that retailer is much different. Sears is increasingly opening stores away from malls, while Federated is essentially doubling down on its bet that shopping malls are still relevant.

Federated, based in Cincinnati, has 450 stores and annual sales of $15.6 billion. St. Louis-based May has 491 department stores and annual sales of $14.4 billion.

The combined company will have "very little overlap" in store locations, Federated Chief Executive Terry Lundgren said. He is expected to remain CEO for the combined company.

Federated said it does expect "some dispositions" of stores but didn't elaborate which ones or in which markets.

It is likely a number of stores will be put up for sale due to geographic overlap, antitrust concerns or poor locations, retail analysts said Monday.

In the Chicago area, May and Federated have overlapping stores at key shopping areas in the city, at Old Orchard Mall in Skokie and Oakbrook Center in Oak Brook.

At Old Orchard, it has a Bloomingdale's, a Marshall Field's and a Lord & Taylor. A spokeswoman for Westfield Group, the mall's operator, declined to comment except to say the company was "watching the merger with interest."

At Oakbrook Center, there's a Marshall Field's and a Lord & Taylor, as well as a Bloomingdale's Home & Furniture store.

May and Federated also have a total of seven stores in Chicago.

One shopping mall industry source said he'd expect Federated to keep its presence at Oakbrook and Water Tower, calling them "productive stores."

May and Federated overlap in 93 malls, according to a report issued Monday by Merrill Lynch. But only 74 might end up on the market, Merrill Lynch figures.

That's because Federated could keep the Lord & Taylor or Marshall Field's store open if there is already a Macy's or a Bloomingdale's in the mall.

Or if there's only a Bloomingdale's, the former May store, whatever its name, would remain open because it could be converted into the Macy's nameplate, a different customer base from Bloomingdale's.

Nordstrom Inc., J.C. Penney Co. and Sears might be among the retailers interested in whatever stores Federated puts on the market, Merrill Lynch said.

The company said it anticipates $450 million in cost savings by 2007 from combining purchasing and other central functions.

Additional savings could come in advertising. Federated will be able to spend its advertising dollars more efficiently, particularly in markets where it now has critical mass, including Chicago and Detroit.

At a retail conference in January, Lundgren said that he has long wanted to open a store at a particular suburban Detroit mall. But he questioned the propriety of doing so unless he had a critical mass of stores in a market.

"It's hard to have big marketing support when you've got one store in a market," he said.

Federated spent $561 million on ads in 2004, down 1.6 percent from 2003, according to Nielsen Monitor Plus.

May's ad spending in 2004 was $573 million, down 1.5 percent from 2003. Two-thirds of their combined spending was in newspapers.

The deal's terms include Federated assuming May debt that amounted to about $6 billion at year's end, valuing the total deal at about $17 billion.

The deal is subject to regulatory and shareholder approval. The companies hope to close the deal in the third quarter.

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