Federated Agrees to Buy Fingerhut for $1.5 Billion in Cash

Federated Department Stores Inc., the company behind the Macy’s and Bloomingdale’s chains, agreed Thursday to acquire Fingerhut Cos. for about $1.5 billion to speed its expansion on the Internet.

Federated said it will pay $25 cash for each diluted share, or $1.5 billion, for Fingerhut, which sells household and general merchandise through catalogs and Web sites. It will also take on $200 million in debt.

Federated, the third-largest U.S. department store company, wants to jump-start stagnant sales by grabbing a bigger share of online retailing, a market some forecasters say could triple annually over the next several years.

For Fingerhut, that could mean Internet sales of $100 million in 1999 through its Web sites and stakes in online retailers. And Fingerhut’s expertise in marketing goods using its customer database and handling orders could help Federated sell more on the Web, including on its Macys.com site.

“The future is the Internet, and Federated has talked about how they want to make a big push there,” said senior portfolio manager Timothy Ghriskey at Dreyfus Corp., which held 1.3 million Federated shares as of December.

Minnetonka, Minn.-based Fingerhut gets most of its estimated $2 billion in annual sales from its namesake catalog, which sells electronics, linens and other household goods. Most of Fingerhut’s customers are low-to-middle-income families, who buy goods on payment plans or using credit.

As customers’ incomes increase, they typically stop buying from Fingerhut and become dormant accounts in its database of 31 million customers, said President William Lansing. Fingerhut will be able to continue marketing to those consumers using Federated’s more upscale brands, he said.

“Federated is trying to capture an audience which has eluded them until now,” said Kurt Barnard, retail consultant and president of Barnard’s Retail Trend Report.

Fingerhut’s catalogs include the Figi’s food and gift catalog, the Arizona Mail Order and Bedford Fair apparel catalogs, and the Popular Club membership-based general merchandise catalog.

Federated operates more than 400 department stores under the names Rich’s, Stern’s and others. Its mail-order business includes the Bloomingdale’s by Mail and Macy’s by Mail catalogs.

Fingerhut, which has stakes in sites such as Roxy.com, Mountain Zone and FreeShop, plans to continue buying pieces of Internet companies, Lansing said. Its own sites include Fingerhut and Andy’s Garage.

The market for goods and services offered on the Internet is expected to reach about $13 billion this year and to triple annually over the next few years, according to a study by Shop.org and Boston Consulting Group.

Sales at department stores are rising about 2% to 3% a year, analysts said. Federated’s sales were unchanged at about $10.6 billion in the first nine months of the year.

Federated has been looking at a number of direct-marketing companies in the last year, said Claire Gruppo, president of Gruppo, Levey & Co., an investment banking firm that advises Internet and direct marketers.

“They just don’t have the kind of assets and skill sets in their existing retail business that you need to run a large, growing, profitable Internet business,” she said.

Other big retailers, such as Wal-Mart Stores Inc., Nordstrom Inc. and Sears, Roebuck & Co., are building up their own Web sites rather than making large purchases. But other retailers, such as May Department Stores Co., aren’t convinced the Internet can substantially boost their sales.

“Federated’s making a move that’s much more aggressive into electronic commerce,” said Thomas Buynak, director at Society Asset Management. “We’ll see who’s right.”

The Fingerhut purchase won’t preclude Federated from making other acquisitions, Federated told analysts and investors. The department store company may be interested in buying all or some of T. Eaton Co., a Canadian chain, analysts and investors said.

Federated said the acquisition may reduce its earnings, but it declined to be specific.

The company said it does not expect layoffs or management changes at Fingerhut.

Fingerhut shares climbed $5.56, or 30%, to close at $24.38 on the New York Stock Exchange. Federated fell $2.81, or 6.6%, to close at $39.69, also on the NYSE.