May Discloses Sweetened Bid for Associated : Chairman Unhappy With Rejection of Offer, Warns Against Bust-Up Strategy

May Department Stores said Thursday that it has sweetened its takeover bid for Associated Dry Goods and expressed dismay that Associated continued to reject it.

In a letter to Associated, May Chairman David C. Farrell disclosed that his company recently offered a “modified merger proposal” that would provide for the exchange of 0.85 shares of May common for each share of Associated common. It was the company’s first public disclosure of an exchange ratio.

Based on May’s closing price Thursday of $79.62 1/2, the stock swap would be valued at $2.77 billion, or $67.68 per share.

May’s initial offer, announced June 22, was for $2.7 billion, or $66 a share.

In his letter to Associated Chairman Joseph H. Johnson, Farrell said: “We are hopeful that upon further reflection your board of directors will accept our proposal, having concluded that it is in the best interests of your shareholders and is a superior alternative to a bust-up of your company.”

He also noted that May had pledged in the discussions to provide “significant protection for (Associated’s) employees.”

Lord & Taylor Most Attractive

Earlier Thursday, Associated issued a statement saying that recent talks with its suitor had failed to produce agreement on a purchase price but that “a number of prospective purchasers” had expressed interest in buying Associated divisions.

New York-based Associated’s most attractive divisions include Lord & Taylor, an upscale department store chain known primarily for apparel; Caldor, a discount chain in the Northeast, and J. W. Robinson in Southern California.

May, based in St. Louis, is the parent of May Co. California.

“One reason Associated had to explore alternatives such as selling divisions or otherwise restructuring was so that they could negotiate all options from a position of strength,” said Edward Weller, a retail analyst with E. F. Hutton in New York. “There’s no strength in negotiating when you have no alternatives.”

Commenting on interest in Associated’s divisions, Monroe Greenstein, an analyst with Bear, Stearns & Co. in New York, said that “there’d be a line around the block for Lord & Taylor.”

Sets Stage for Lawsuit

Although stressing that May felt its offer to be in the best interests of Associated’s shareholders, Farrell issued a strongly worded statement to Johnson, saying in effect that if Associated starts selling chunks of the company, then May wants an opportunity to buy them.

A Wall Street source said the statement set the stage for a possible lawsuit if Associated tries to sell anything without first informing May.

Analyst Weller said the combination would benefit both companies. “I believe it would be a good thing for Associated to take advantage of some of the financial and operating controls which are so extraordinarily well developed at May Co.,” he said.

Besides rejecting May’s $66-a-share stock swap offer, Associated last week also rejected a hostile $60-a-share cash tender offer from May worth about $2.4 billion. However, Associated also indicated a willingness to consider “fair offers” from May or other possible suitors.

In trading Thursday on the New York Stock Exchange, Associated closed up 62 1/2 cents per share at $65.62 1/2. With nearly 1.7 million shares trading hands, it was the eighth most active issue. The 25-cent drop in May Department Stores shares came on volume of 268,700 shares.