Sears, Roebuck & Co. and Kmart Holding Corp. today announced that they had agreed to merge in an $11-billion deal as part of a bold bid to revive the fortunes of two of America's retail icons.
The merged company, which would rank as the nation's third-largest retailer behind Wal-Mart and Target, will continue to operate stores under the Sears and Kmart names. The companies also would merge their lineup of exclusive brands, with Sears selling Kmart's Martha Stewart Everyday housewares along with its Kenmore appliances and Craftsman tools.
The deal represents a coup for investor and Kmart Chairman Edward S. Lampert, who owns a majority of the discount retailer's shares and helped steer it out of Bankruptcy Court last year. Lampert, who is also a major Sears stockholder, will be chairman of the combined company, which will be known as Sears Holdings.
Lampert's investment company, ESL Investments, said it will vote all Kmart and Sears shares in favor of the merger. The board of directors of both companies have agreed to the combination, which must still be approved by shareholders and government regulators.
Merging the legendary rivals "will create a powerful leader in the retail industry, with greatly expanded points of distribution, leading proprietary home and apparel brands and significant opportunities for improved scale and operating efficiencies," Lampert said in a statement. "The merger will enable us to manage the businesses of Sears and Kmart to produce a higher return than either company could achieve on its own."
Wall Street embraced the deal and sent shares of both companies spiraling upward. On the New York Stock Exchange, Sears stock soared more than 17% to close at $52.99. Kmart shares rose more than 7% on the Nasdaq to end the day at $109.00.
News of the agreement even gave a boost to Martha Stewart's company, Martha Stewart Living Omnimedia, whose shares ended the day up more than 6%.
Despite Wall Street's enthusiasm, some industry observers expressed caution about the marriage of two companies that have struggled for years to regain some of their lost glory. In a note to investors, analyst Jason Asaeda at Standard & Poor's said the deal would boost revenue and cut costs, but also posed risks "given divergent cultures and customer mix."
Asaeda and other industry analysts also raised the prospect that the emergence of a higher, rival bid "is not out of the question."
Under the deal, Kmart stockholders would receive a new Sears Holdings share for every share of Kmart they own. Sears stockholders would have the option of receiving $50 in cash for each of their Sears shares or exchanging them for 0.5 shares in new Sears Holdings stock. Based on Tuesday's closing stock prices, Sears Holding stock was worth $50.61 a share.
Sears Holdings would operate nearly 3,500 stores and generate $55 billion in annual revenues. Though Kmart and Sears would continue to operate separately, the new company plans to convert a "substantial" number of Kmart outlets into Sears, which has been adding free-standing stores to supplement its traditional mall sites. That would be in addition to the 50 Kmart locations Sears purchased this year.
Company officials said that Sears Holdings would eventually generate $300 million in annual cost savings and an additional $200 million a year in revenue through cross selling. The company would be based in the Chicago suburb of Hoffman Estates, where Sears is headquartered.
The merger is the most recent and drastic attempt to reverse decades of decline at both companies. Sears once dominated the retail industry with an empire of sprawling department stores and catalog operations that catered to the nation's middle class; Kmart helped pioneer the discount store chain concept with a coast-to-coast network of suburban outlets, where the famed "flashing blue light" signaled daily deals.
Eventually, both chains were eclipsed by Wal-Mart and Target, which operated more efficiently and have been more adept at keeping up with changing consumer tastes.