Macy’s Executives May Take Retailer Private in $3.58-Billion Deal
Top managers of R. H. Macy, the nation’s 10th-largest retailer, said Monday that they intend to take the company private in what would be the largest takeover of a retailer and among the largest leveraged buy-outs ever.
Edward S. Finkelstein, Macy’s chairman and chief executive, and Mark S. Handler, the company’s president and chief operating officer, are leading a group of several dozen senior executives in an offer of $3.58 billion in cash, or $70 a share, for the 51.2 million Macy’s shares outstanding.
One senior Macy’s executive, who spoke on the condition that he not be identified, said the takeover would give management “a personal stake in the company” and thus help make the retailing giant “more entrepreneurial and innovative.”
Analysts Say Offer Fair
Industry analysts, who said Macy’s was ripe for a takeover because a recent earnings drop has caused its stock to be undervalued, called the $70-a-share offer fair. They said that they expect Macy’s board to accept the proposal and that no competing bids from other investors will be made.
Macy’s is known to millions for its Thanksgiving Day parade that for 60 years has ended with Santa Claus’ arrival at its flagship store--the largest retail store in the world--on New York’s Herald Square. Macy’s and the parade were the subject of a Christmas movie favorite, “Miracle on 34th Street.”
But in the business community, the store also became well known for a spurt of rapid growth from 1981 to 1984. Under Finkelstein’s blueprint, the stores cater to young, affluent consumers by offering trendy fashions at competitive prices. With the increase in sales came a rapid expansion, especially into high-income areas such asthe Sun Belt states and the San Francisco Bay Area.
Strategy Came Under Attack
But, when a slump hit the retail clothing industry last year, Macy’s found its profit margin particularly hard hit because of costs associated with the expansion, overstocked inventories and its pricing policies. Finkelstein, whose approach to retailing had become an industry model and had made him a Wall Street favorite, suddenly found his strategy under attack.
Several industry sources say the proposed leveraged buy-out represents Finkelstein’s unwillingness to buckle to that pressure and is evidence of management’s continued confidence in the long-term success of Macy’s marketing tactics. Agreed the senior Macy’s executive: “We’re not going to change anything. We’ve enunciated our strategy. We’re going to stick to it.” He added: “I expect the board will accept our proposal. Otherwise, it never would have gotten this far.”
Wall Street reacted favorably to the proposed buy-out. Macy’s stock was the third most actively traded issue Monday on the New York Stock Exchange with more than 2 million shares changing hands. The stock closed the day at $63.25 a share, up $16.125.
The largest completed takeover of a retailer was Mobil Corp.’s purchase of Marcor Inc., the parent of Montgomery Ward, for $1.69 billion, according to W. T. Grimm & Co., a Chicago-based mergers and acquisitions consulting firm. But Mobil recently decided to spin off the poorly performing Montgomery Ward unit, the nation’s sixth-largest retailer.
Analysts said other investors are unlikely to make a competing bid for Macy’s because they wouldn’t have management’s backing.
“Without management, you don’t have very much,” said retail analyst Walter Loeb of Morgan Stanley & Co, who called Macy’s “a very well run” company with an ample chance to succeed as a private concern.
No Stores in Southland
Macy’s, as part of its recent marketing strategy, has opened 12 new stores since March, 1982, including four in Northern California and seven in the Sun Belt states of Texas, Florida and Georgia. Both regions have high concentrations of high-income households. Macy’s has 25 stores in California but none in Southern California--despite the income level here--and says it has no plans to enter this market.
Macy’s was started in 1858 by Rowland Hussey Macy, a former Nantucket whaler who had failed at several earlier attempts in the retailing business. The first Macy’s store, in downtown Manhattan, sold fancy goods and stationery items. The company was acquired in 1896 by Isadore and Nathan Straus, who later sold stock to the public to expand it nationwide.
The company has 55,000 employees and operates 95 stores in 14 states, including New York, Pennsylvania, Delaware and Maryland. Its store at Herald Square in New York has 2.151 million square feet of space, making it the world’s largest retail store and bigger than most shopping centers. Macy’s also operates Bambergers and Davison’s stores on the East Coast.
Awaits Financing
For its 1985 fiscal year, the company reported that net income declined 14.8% to $189 million as sales increased 7% to $4.37 billion.
Finkelstein and Handler said in a prepared statement Monday that they will formally present the proposal to the Macy’s board as soon as they arrange financing, expected within weeks. The executives have retained Goldman, Sachs & Co. as their financial adviser. Macy’s board has set up a committee to consider the offer.
Leveraged buy-outs are financed largely with borrowed money secured by the assets and future earnings potential of the company being purchased. Often, company executives orchestrate the arrangement, usually putting up a relatively small amount of cash to be involved in the investment.
The largest completed leveraged buy-out took place when Allied Corp. sold a 50% interest in its Union Texas Petroleum subsidiary for $1.7 billion in cash and stock to top management and the investment banking firm of Kohlberg Kravis Roberts.
Kohlberg Kravis recently proposed a $4.91-billion buy-out of Beatrice Cos.
