The St. Louis owner of the May Co. department stores in California said Sunday that it has launched an effort to acquire the corporation that owns Robinson's department stores in a $2.7-billion stock transaction that would rank as the largest merger in the hotly competitive retail industry.
May Department Stores disclosed that it had made its offer to buy Associated Dry Goods of New York in a letter hand-delivered Friday to Joseph H. Johnson, chairman and chief executive. Associated Dry Goods' board of directors will discuss the merger offer at its regularly scheduled board meeting today.
In his letter, May Chairman and Chief Executive David C. Farrell noted that he and Johnson have had several "friendly and positive" discussions during the last two years about combining the two companies.
"After considering further the desirability of combining our businesses, we have now concluded that both our organizations and our respective shareholders could realize significant benefits as a result of a merger, and that the best way to present this matter to you at this time for your consideration is by means of a firm proposal," Farrell said.
Associated Dry Goods' initial reaction appeared to be cool. Although Johnson expressed no opinion on the offer Sunday, an Associated statement noted that the proposal was "unsolicited" and a "conditional invitation to negotiate." Farrell had invited Johnson to meet over the weekend, but Johnson, who was moving into a new house, didn't accept.
Under its proposal, May Department Stores would pay Associated's shareholders $66 worth of May common stock for each share of Associated common stock, which closed Friday at $46 in trading on the New York Stock Exchange. In addition, May would pay $211.20 worth of common stock for each share of Associated's preferred stock that can be converted to common shares. Associated has nearly 34.8 million common shares outstanding and 1.7 million shares of convertible preferred stock.
May Department Stores gave Associated a deadline of 9 a.m. EDT on Tuesday to respond to the offer.
Although the proposed combination of May Department Stores and Associated Dry Goods would lag behind last week's $3.7-billion management buy-out of Macy's, it would rank as the largest merger in the retailing industry and thrust together two of the most powerful forces in the Southern California department store scene. With $5 billion in sales, May Department Stores is slightly larger than Associated, which posted sales last year of $4.4 billion.
Would Fit Together
May Department Stores, in its letter to Associated's Johnson, described the New York-based firm as a "well-managed company with attractive business operations." But it did not go into detail about its reasons for proposing the merger, and May Department Stores executives were unavailable for comment.
Analysts said the two firms would fit together well because each owns stores that target similar categories of consumers, from the upscale buyer to the traditional department store shopper and the consumer looking for discount merchandise.
May Department Stores owns 144 department stores under the names May Co., Hecht and Kaufmann's, among others. It also owns the upscale Famous-Barr chain. May also operates the Venture chain of 62 discount stores in the Midwest and 1,977 self-service discount shoe stores, primarily under the name Payless ShoeSource.
Associated Dry Goods has 10 department store divisions, including J.W. Robinson in California and the trendy Lord & Taylor chain. Associated also owns the Loehmann's off-price women's clothing retailer and the Caldor discount chain in the Northeast.
"If you mesh it all together, it makes sense," said Olha Holoyda, a retail analyst with the Stifel, Nicolaus & Co. investment firm of St. Louis. "In a sense, they (May and Associated) are targeting the same consumers." The locations of many of the two firms' operations on the West Coast and the Midwest also are similar, she said.
'Associated Is a Big Chunk'
Holoyda said she had been expecting May to try to buy another retailer, but not one the size of Associated Dry Goods. "The whole thing is sort of a surprise to me because Associated is a big chunk," she said.
Sarah A. Stack, an analyst with the Bateman Eichler, Hill Richards brokerage firm in Los Angeles said that mergers are inevitable in the department store business.
"Traditional department stores have lost business over the last 10 years to specialty stores of all kinds," Stack said. "People perceive that service is not so great at department stores and a lot of department stores really start to look alike no matter where you go in the country."
May Department Stores is generally described as a well-managed retailer that was able to offset sluggish gains last year in its department stores with sharply better performance in its discount, shoe and real estate divisions. For the fiscal year ended Feb. 1, May earned a net profit of $235 million on sales of $5 billion, up from a profit of $214 million on sales of $4.6 billion the year before.
New Stores Planned
May on Friday announced that it will spend a record $2 billion over the next five years to build new stores, including perhaps as many as eight new May Co. outlets in Southern California.
Associated Dry Goods has had problems in its J. W. Robinson operations, and operating profits at its other quality department stores, "while good, have not been great," according to Value Line Investment Survey. Recent management changes at Robinson's could improve the company's profitability, Value Line said.
The Caldor chain, whose sales sagged during bad weather in February, was a dark spot in the quarter ended in April, but Value Line said the results were probably an exception to the chain's usual performance.
Associated had a net profit of $119.7 million for the year ended Jan. 31 on sales of $4.4 billion, compared to earnings of $120.7 million on sales of $4.1 billion for the previous fiscal year.
The proposed merger of the two retailers would be tax-free to both stockholders and May Department Stores because of an accounting method, known as "pooling of interests," in which the balance sheets of the two companies are simply added together.
Also under the merger proposal, Johnson and several other Associated directors would be offered seats on May Department Stores' board of directors.