Meetings Begin on Possible Merger of Federated, Macy : Finance: Combined firm would create nation’s largest department store chain, intensify state’s competition.
Two of the nation’s biggest department store chains opened discussions Monday on a possible merger that could create a dominant new national force in retailing and further intensify California’s cutthroat competitive environment.
Although New York-based R. H. Macy & Co. said it would be premature to comment on a possible merger with Cincinnati-based Federated Department Stores, many analysts said they believe a combination--which would create the nation’s largest department store chain--will happen because the two companies have compelling reasons to get together.
Big department stores have been struggling in recent years from fierce competition from discount chains and specialty stores. Some chains have closed stores and others have combined operations to save money. For example, Los Angeles-based Carter Hawley Hale Stores, which operates The Broadway chain, has consolidated some support operations and May Department Stores recently merged its Robinsons and May Co. chains.
A merger would help Macy and Federated compete more effectively by lowering their expenses and giving them increased bargaining power with suppliers. Savings could be passed along to consumers in lower prices.
A combination with Federated could also allow Macy to emerge more quickly from Chapter 11 bankruptcy court protection. It also could offer a marked contrast to the merger mania of the 1980s when department stores gobbled up each other to gain market share. Now the chains are combining operations to survive the competitive onslaught from discount stores such as Wal-Mart and specialty apparel stores.
For Federated, which owns Bloomingdale’s and other chains, a major goal of a merger would be to get a base in California, where Macy operates the Bullock’s and I. Magnin chains.
“One way or the other, a merger is likely because it would be in the best interests of both companies,” said Kurt Barnard, a New York-based retail economist. “Federated needs to expand, and it’s imperative that they get a foothold in California.”
Added Walter Loeb, a New York-based retail analyst: “Major department stores can continue to operate successfully only by expanding their revenue base--and a merger is one way to accomplish that.”
Although Federated once had a California presence through Bullock’s, none of its chains--Bloomingdale’s, Abraham & Strauss, the Bon Marche, Burdines, Goldsmith’s, Jordan Marsh, Lazarus, Rich’s and Stern’s--have stores in California, the most populous state and home to some of the nation’s most lucrative retail markets.
On the other hand, nearly half of Macy’s 111 Macy and Bullock’s department stores are in California. Macy also has 11 of its 12 I. Magnin stores here.
Federated executives have said they would like to establish Bloomingdale’s, its most prestigious nameplate, in California. Such an opening might be easier if the company controlled leases on current stores in the state.
A combination of Macy and Federated would create problems for May and Carter Hawley Hale because the merged company could acquire products cheaper and challenge its competitors by lowering the prices on that merchandise, analysts said.
Federated publicly raised the idea of a merger with Macy on Sunday when it disclosed that it had bought half of the Macy debt held by the Prudential Insurance Co. Federated would become Macy’s largest creditor--with 15% of the total debt--if it exercises an option to buy the other half of Prudential’s secured claim.
The purchase gives Federated a seat at the bargaining table in Macy’s two-year-old Chapter 11 bankruptcy reorganization and is the first step in a friendly bid for control of Macy. If Macy rejects a friendly merger, Federated could launch a successful hostile bid for control, legal experts and industry analysts say.
“Federated is in a very strong position, and Macy will likely be forced to accept a merger,” said Marc Beilinson, a Los Angeles-based lawyer who specializes in bankruptcies at the Los Angeles law offices of Pachulski, Stange, Ziehl & Young.
Federated could launch a hostile bid by proposing that the secured claims of creditors be converted to equity ownership in Macy, Beilinson said. If one-half of the creditors approve that plan--and if those creditors control two-thirds of the total debt--secured creditors could seize control of the company, Beilinson said.
Macy said it was premature to comment on the notion of a merger and Chairman Myron E. Ullman stressed that the company was focusing most heavily on its reorganization plan--not merger talks. He said Macy would discuss the company’s reorganization options with all creditors--including Federated.
“Since beginning the reorganization process nearly two years ago, we have focused on restructuring the company’s operations,” Ullman said. “We have made good progress in implementing our business plan and are aggressively continuing the rebuilding process.”
Federated was upbeat about the reaction of the Macy team.
“They were very professional and receptive to exploring the idea of a merger, and the meeting ended with the clear understanding that the two sides will be talking again,” said Federated spokeswoman Carol Sanger.
Sanger said Federated would be developing a specific merger proposal and would discuss its ideas with other major Macy creditors.
News of a possible merger sent Federated shares up $2 to close at $22.75 in composite trading on the New York Stock Exchange. Meantime, Macy’s 14 1/2% bonds due 1998 rose to $510 per $1,000 bond from $422.50 last week.
Away from the financial markets, Washington also took seriously the idea of a merger between the two retail giants.
Sen. Howard M. Metzenbaum (D-Ohio) asked the Justice Department and the Federal Trade Commission to examine whether a merger could hurt competition in the retailing industry.
A Federated-Macy union would create a department store company with 330 stores, surpassing May Department Stores Co., which owns 312 stores and is currently the nation’s largest.
Federated’s move represents a reversal of fortunes for itself and Macy. In 1988, Macy was an unsuccessful bidder to buy Federated. Federated was acquired later that year by Canadian businessman Robert Campeau.
After the Campeau takeover, Federated sold its I. Magnin and Bullock’s store groups in California to Macy.
Indeed, Federated chief Allen I. Questrom was chairman of Bullock’s when it was controlled by Federated.
“Given Questrom’s familiarity with California, he might see opportunities in the state,” said an executive at a competing retailing firm.
Campeau’s real estate and retailing empire unraveled and sent Federated into Chapter 11. Federated emerged as a reorganized company in 1992 and is now one of the nation’s strongest retailers.
Macy’s financial troubles started in 1986 when it amassed an enormous debt in a leveraged buyout by management.
Regardless of whether a Federated-Macy marriage is consummated, analysts said they expect more mergers.
“There has been massive consolidation in retailing--including the department store sector--and that will probably continue,” said Ira Kalish, a retail economist at the Los Angeles offices of Management Horizons, a division of Price Waterhouse.
Kalish cited the recent merger of Price Co. and Costco--two warehouse store giants--and the expansion of the Little Rock-based Dillard Department Stores, which has been acquiring smaller chains in recent years.
“The advantage of acquisitions is you get a franchise that is established in (the) eyes of (the) consumer as opposed to building a new store, which entails more risk,” Kalish said.
The Nation’s Best Sellers The nation’s top retailers and some of their subsidiaries:
1. Wal-Mart Stores Inc.
* Based: Bentonville, Ark.
* Subsidiaries: Wal-Mart discount stores, Sam’s Club, Bud’s Outlets.
2. K mart Corp.
* Based: Troy, Mich.
* Subsidiaries: K mart discount stores, Builders Square, Waldenbooks, the Sports Authority.
3. Sears, Roebuck & Co.
* Based: Chicago
* Subsidiaries: Sears department stores, Eyecare Centers of America, Homelife Furniture
4. Dayton Hudson Corp.
* Based: Minneapolis
* Subsidiaries: Mervyn’s, Marshall Fields, Dayton’s, Hudson’s (department stores), Target discount stores.
5. J.C. Penney Co. Inc.
* Based: Dallas
* Subsidiaries: J.C. Penney department stores, Thrift-Treasury Drug, Units clothing stores.
6. May Department Stores Co.
* Based: St. Louis
* Subsidiaries: Lord & Taylor, Hecht’s, Filene’s, Foley’s (department stores), Payless Shoe.
7. Melville Corp.
* Based: Rye, N.Y.
* Subsidiaries: Kay-Bee toys, CVS drugs, Linen ‘n Things home furnishings, Thom McAn shoes, Wilson’s apparel.
8. Federated Department Stores Inc.
* Based: Cincinnati
* Subsidiaries: Bloomingdale’s, Abraham & Strauss, Bon Marche, Burdine and Jordan Marsh (department stores).
9. R.H. Macy & Co.
* Based: New York
* Subsidiaries: Macy, Bullock’s (department stores), I. Magnin and Charter Club (apparel stores).
10. The Limited Inc.
* Based: Columbus, Ohio
* Subsidiaries: The Limited, Victoria’s Secret, Abercrombie & Fitch, Express, Lane Bryant and Lerner New York (apparel stores).
Source: International Council of Shopping Centers, Associated Press
