May-Federated Merger Talks Showing Life
May-Federated Merger Talks Showing LifeBy ANDREW ROSS SORKIN and TRACIE ROZHON
ay Department Stores, which owns Lord & Taylor and Marshall Field's, has suspended its search for a chief executive as merger talks with Federated Department Stores advanced over the weekend, executives close to the company said yesterday.
May's decision to halt the search process is the most significant indication yet that it is seriously considering a takeover bid from Federated, the nation's largest department store company, with chains like Macy's and Bloomingdale's. May instructed the executive recruitment firm it had hired, Spencer Stuart, to "put the search on the back burner" while it negotiates with Federated, one executive said. May had hired Spencer Stuart a month ago when its chairman and chief executive, Gene S. Kahn, was ousted. His resignation led Federated to approach May.
The talks between Federated and May, which have taken place in fits and starts, appear to have gained momentum over the weekend, the executives said.
"Up until now, there's been a lot of posturing," one participant in the talks said. "This is the first time I've felt there's a legitimate chance we will get across the finish line."
While a deal is not expected in the next several days, the executives said they were increasingly optimistic an agreement could be struck. Whether a deal will be reached will turn on the price of Federated's final offer for May, executives from both camps agreed. So far, May has been holding out for a price "north of $40 a share," one executive said. Federated, which has a history of walking away from deals, had indicated it only wanted to pay in the "mid-30's" but in recent days indicated it may be willing to "stretch," as one executive described it.
And May has "been more willing to compromise," the executive said. Shares of May closed at $33.45 on Friday. A spokeswoman for May declined comment last night; Federated officials could not be reached for comment.
While a $40-a-share deal for May might seem steep, it would represent about a 40 percent premium over the company's share price when Mr. Kahn resigned. Analysts suggest that Federated would still benefit by the cost savings it could create by shutting down overlapping stores and eliminating back-office functions. According to Wayne Hood, an analyst at Prudential Equity Group, Federated would probably save $200 million in the first year of a deal.
But Joshua R. Goldberg, a managing director of Mercantile Capital Partners, a private equity firm in Manhattan, said that any merger or acquisition would have to address more than account books and underperforming locations.
"There may be back-office synergies, but will a combined May-Federated be more attractive and effective with customers than each is now?" he asked. "The great challenge facing department stores today is improving their creativity to compete with the best specialty stores in the mall."
Although neither Federated nor May has performed spectacularly recently, May has performed far worse, with declining sales figures going back three years. While Federated's sales at stores open at least a year fell 0.4 percent in January, May's decline was 7 percent.
Meanwhile, Terry J. Lundgren, Federated's chief executive for the last two years, continues to receive plaudits from retail analysts, bankers and rivals.
"Federated is the best traditional department store chain out there," said Bill Dreher, an analyst from Deutsche Bank who covers both Federated and May, but does not own either stock.
Like many other analysts and retail consultants, Mr. Dreher said he felt that May was bringing little to the table, "other than $15 billion in sales volume and 500 stores."
In the first three to five years after such a merger, he predicted, there would be "no doubt dramatic improvement in May's operating matrix that should be able to drive sales and earnings." The problem, he said, might come after that, "without more revolutionary change."
May, led by interim chief executive John L. Dunham, has been under increasing pressure to accept an offer from Federated. The news of Federated's interest had made the search for a chief executive nearly impossible and has led to a slowdown in productivity among the employees, the executives acknowledged.
Several executives close to May blame Federated for fanning the takeover speculation "to put us in a box," as one said.
Federated, based in Cincinnati, and May, based in St. Louis, have done the merger dance before. About two and a half years ago, the two companies came close to merging, but disputes over who would run the company led the talks to breakdown. With Mr. Kahn out, and May in need of a new chief executive, a deal with Federated would seem natural.
In addition, many analysts and investment bankers say they cannot see anyone else buying such a huge chain as May, especially with its weak performance.
The only other alternative - which some on the May board favor, according to several retail executives - is turning the chain around first, to make it worth more.
"It's highly unlikely that a financial sponsor in the private equity community or a real estate investment trust would take it on," said Mr. Dreher of Deutsche Bank. "And Federated is certainly the only department store that could do it."
ay Department Stores, which owns Lord & Taylor and Marshall Field's, has suspended its search for a chief executive as merger talks with Federated Department Stores advanced over the weekend, executives close to the company said yesterday.
May's decision to halt the search process is the most significant indication yet that it is seriously considering a takeover bid from Federated, the nation's largest department store company, with chains like Macy's and Bloomingdale's. May instructed the executive recruitment firm it had hired, Spencer Stuart, to "put the search on the back burner" while it negotiates with Federated, one executive said. May had hired Spencer Stuart a month ago when its chairman and chief executive, Gene S. Kahn, was ousted. His resignation led Federated to approach May.
The talks between Federated and May, which have taken place in fits and starts, appear to have gained momentum over the weekend, the executives said.
"Up until now, there's been a lot of posturing," one participant in the talks said. "This is the first time I've felt there's a legitimate chance we will get across the finish line."
While a deal is not expected in the next several days, the executives said they were increasingly optimistic an agreement could be struck. Whether a deal will be reached will turn on the price of Federated's final offer for May, executives from both camps agreed. So far, May has been holding out for a price "north of $40 a share," one executive said. Federated, which has a history of walking away from deals, had indicated it only wanted to pay in the "mid-30's" but in recent days indicated it may be willing to "stretch," as one executive described it.
And May has "been more willing to compromise," the executive said. Shares of May closed at $33.45 on Friday. A spokeswoman for May declined comment last night; Federated officials could not be reached for comment.
While a $40-a-share deal for May might seem steep, it would represent about a 40 percent premium over the company's share price when Mr. Kahn resigned. Analysts suggest that Federated would still benefit by the cost savings it could create by shutting down overlapping stores and eliminating back-office functions. According to Wayne Hood, an analyst at Prudential Equity Group, Federated would probably save $200 million in the first year of a deal.
But Joshua R. Goldberg, a managing director of Mercantile Capital Partners, a private equity firm in Manhattan, said that any merger or acquisition would have to address more than account books and underperforming locations.
"There may be back-office synergies, but will a combined May-Federated be more attractive and effective with customers than each is now?" he asked. "The great challenge facing department stores today is improving their creativity to compete with the best specialty stores in the mall."
Although neither Federated nor May has performed spectacularly recently, May has performed far worse, with declining sales figures going back three years. While Federated's sales at stores open at least a year fell 0.4 percent in January, May's decline was 7 percent.
Meanwhile, Terry J. Lundgren, Federated's chief executive for the last two years, continues to receive plaudits from retail analysts, bankers and rivals.
"Federated is the best traditional department store chain out there," said Bill Dreher, an analyst from Deutsche Bank who covers both Federated and May, but does not own either stock.
Like many other analysts and retail consultants, Mr. Dreher said he felt that May was bringing little to the table, "other than $15 billion in sales volume and 500 stores."
In the first three to five years after such a merger, he predicted, there would be "no doubt dramatic improvement in May's operating matrix that should be able to drive sales and earnings." The problem, he said, might come after that, "without more revolutionary change."
May, led by interim chief executive John L. Dunham, has been under increasing pressure to accept an offer from Federated. The news of Federated's interest had made the search for a chief executive nearly impossible and has led to a slowdown in productivity among the employees, the executives acknowledged.
Several executives close to May blame Federated for fanning the takeover speculation "to put us in a box," as one said.
Federated, based in Cincinnati, and May, based in St. Louis, have done the merger dance before. About two and a half years ago, the two companies came close to merging, but disputes over who would run the company led the talks to breakdown. With Mr. Kahn out, and May in need of a new chief executive, a deal with Federated would seem natural.
In addition, many analysts and investment bankers say they cannot see anyone else buying such a huge chain as May, especially with its weak performance.
The only other alternative - which some on the May board favor, according to several retail executives - is turning the chain around first, to make it worth more.
"It's highly unlikely that a financial sponsor in the private equity community or a real estate investment trust would take it on," said Mr. Dreher of Deutsche Bank. "And Federated is certainly the only department store that could do it."
