Federated OKs Takeover Bid by Macy’s
Federated Department Stores, owner of Bullock’s department stores and Ralphs supermarkets, agreed Wednesday to a takeover by R. H. Macy & Co. that would create the nation’s third-largest retailing company, with more than $16 billion in sales.
But the merger, valued at about $6.3 billion, appeared far from assured late in the day, as spurned suitor Robert Campeau invited an old-fashioned Wall Street brawl by boosting his own offer for Federated shares to more closely match Macy’s.
“This thing’s a long way from over,” one Wall Street source said.
The hostile action by Toronto developer Campeau left in doubt whether Federated’s board of directors, led by Chairman Howard Goldfeder, would have to reconsider its agreement with Macy’s. Before Campeau’s announcement, Goldfeder praised the “potential long-term benefits” of the merger with Macy’s and said he planned to step down.
But a Wall Street source close to Macy’s dismissed Campeau’s move as “a weak response.”
The stakes are high. Federated, based in Cincinnati, owns valuable real estate and some of the nation’s most prestigious department store chains, including Bloomingdale’s, Abraham & Straus, Filene’s and I. Magnin. Since Campeau made his initial $4.2-billion bid on Jan. 25, the price of Federated has been bid up by $2 billion.
A combination with Macy’s would create a powerhouse retailing company that would rank behind only Sears, Roebuck & Co. and K mart in annual sales. If Campeau succeeds, the developer would control some of the nation’s most prominent chains and have great power in deciding which stores would go into malls and under what terms.
In a telephone interview Wednesday, Macy’s Chairman Edward S. Finkelstein said he expects a sale of Compton-based Ralphs Grocery, a 129-store supermarket chain with 15,000 employees, to be announced relatively soon. “We’re not going to be in the food business,” he said. “It’s not a business we know.”
A Major Interest
Finkelstein, 62, said that Southern California has long been one of Macy’s “major interests” but added that “it’s not easy to get your foot into an entrenched marketplace.” The ownership of Bullock’s, he said, would “accelerate an entry into Southern California on a broad base by eight to 10 years.”
He said Macy’s has “no plans for a name change” at the venerable department store, a Los Angeles fixture since 1906. However, sources close to Macy’s noted that the company changed the names of its Bamberger’s stores in the Northeast to Macy’s after years of trying to run joint television ads that only proved confusing to the public. “We didn’t hear three comments from customers after the name change,” one source noted.
At the area’s 22 Bullock’s department stores and seven Bullocks Wilshire specialty stores, employees were informed of the Macy’s deal by store managers, who had been briefed by headquarters executives.
“People don’t know what it means,” one employee said. “There’s some relief in knowing, but no one really knows what’s going to happen.”
‘Seems to Be a Synergy’
Another employee at headquarters said people are trying to look on the bright side. “There seems to be a synergy with a retailer whose history has been to build rather than destroy,” he said.
That was a reference to Campeau, who bought Allied Stores for $3.5 billion in late 1986 and then proceeded to dismantle it. He sold off more than half the divisions and eliminated several thousand jobs. Federated employees have been fearful that a takeover by Campeau would mean similar turmoil.
At a news conference in Cincinnati on Wednesday afternoon, Federated Chairman Goldfeder confirmed that he would resign after helping Finkelstein implement the merger. Goldfeder, 61, would be eligible to receive millions of dollars in “golden parachute” and deferred compensation payments. Golden parachutes have been paid many departing executives during the recent wave of mergers and acquisitions.
Amicable Deal
Even though Goldfeder would be surrendering leadership of his company, observers said the Macy’s deal is amicable and far better for Goldfeder than a takeover by Campeau.
The presence of two tender offers in effect gives shareholders a choice for selling shares. Therefore, they conceivably could sell enough shares to Campeau to give him control, but Wall Street observers said they believed that would be unlikely.
Under Macy’s bid, Federated shareholders would receive $74.50 per share in cash for 80% of the company’s outstanding shares, or a total of about $5.25 billion. The rest of Federated’s shares would be exchanged tax-free for shares equal to 40% of a new company, to be called Macy’s/Federated Inc., that would seek listing on the New York Stock Exchange.
Macy’s said its commercial banks have agreed to provide $6 billion to finance the tender offer. As part of the deal, Federated has also agreed to pay Macy’s $45 million in so-called breakup fees should the deal collapse for reasons other than Macy’s inability to obtain financing.
Better for Shareholders
In agreeing to the deal, Federated’s board determined that it was more valuable to shareholders than a $69.50 offer that Campeau submitted in a last-minute effort to win the board’s support.
As for Wall Street concerns that shareholders are being asked to simply trust that a combined Macy’s/Federated would hold better value, a source close to Macy’s said: “The facts will largely be available when Macy’s commences its tender offer next week,” when documents will be filed with the Securities and Exchange Commission in support of the deal.
The revised offer proposed by Campeau late Wednesday is similar to Macy’s, except that shareholders would receive cash in two stages, rather than cash and stock. The first 80% of Federated shares would be exchanged for $75 each, or $5.29 billion, with the rest then going for $44 each, or about $792 million. Should the breakup fees be invalidated, Campeau said it is prepared to pay the second-tier shareholders an additional $2.20 per share.
Ready to Challenge
Campeau added that it intends to challenge the breakup arrangement in court.
In a statement, Campeau said its revised deal is worth $68 a share. Wall Street sources close to Macy’s put the value of Macy’s offer at a minimum of $71 a share.
Wall Street seemed to express disapproval of the Macy’s offer, sending the price of Federated shares down $1 to $66.75 in composite New York Stock Exchange trading. Nearly 3.6 million shares changed hands, making the issue the day’s most active.
Campeau quickly latched on to that response. “It is obvious from today’s market reaction . . . that the Macy’s offer has less value than the $68 blended value of Campeau’s offer.”
Thomas H. Tashjian, vice president for retailing at the Los Angeles investment firm of Seidler Amdec Securities, said that “Campeau is obviously trying to structure a deal so that investors can easily compare his offer and Macy’s, even to the point of stating a blended value.”
Winner Predicted
Tashjian predicted, however, that Macy’s would eventually end up the victor because of the friendliness of the deal and because in the long term the shareholder investment in the combined companies “would end up with better value.”
Analyst Michelle Y. Davis of Oppenheimer & Co. in New York said shareholders should look beyond the immediate financial picture. “I would prefer an American company to own American department stores,” she said. “I would hope Macy’s would pass along some of its talents. In that sense the consumer would benefit, and the owners would benefit.
“You don’t necessarily have to go to who would pay you the most,” she said. “Other things are at stake.”
She added that department stores as a group are poised to gain market share in the 1990s because they are better able to appeal to the older working woman than are today’s specialty stores, which are largely geared to juniors.
Good Combination
One economist views the Macy’s/Federated combination as one that would bear up well, despite its heavy debt load, should the nation enter a recessionary period. “Even if the economy does falter, they have a couple of things going for them,” said Carl Steidtmann, vice president and chief economist at Management Horizons, a retail consulting firm in Dublin, Ohio. “Department stores tend to do better in recessionary times than other retailers. As strong as this combination will be, it has the potential to take business away from other retailers.”
He added that he expects there will be “some grumbling on the part of the Justice Department” about antitrust concerns, with a focus on key metropolitan markets such as New York and Atlanta. Analysts have speculated that the merged company would sell Federated’s Abraham & Straus division in New York and the Rich’s chain in Atlanta.
