Kmart Holding Corp. is acquiring one of the most venerable names in U.S. retailing, the department store operator Sears, Roebuck and Co., in a surprise $11 billion deal that will create the nation’s third largest retailer, The Associated Press reports.

The combined company under Wednesday’s deal would be known as Sears Holdings Corp., but it was clearly orchestrated by Kmart chairman and Sears shareholder Edward Lampert, who will lead a new board that will be dominated by Kmart directors, the AP reports.

Both companies are consistently among the top 10 jewelry retailers.

The deal marks a remarkable comeback for Kmart, a company once known for its “Blue Light Specials,” that scaled back its operations after seeking bankruptcy protection in 2002. Sears’ roots date to the late 1800s when it offered merchandise by mail order to farmers, opened its first retail store in 1925 and eventually became the nation’s biggest department store operator.

The new company is expected to have $55 billion in annual revenues and 3,500 outlets, the AP reports. That will mean it will trail only Wal-Mart Stores Inc. and Home Depot Inc. among the biggest U.S. retailers.

The new company plans to operate the Kmart and Sears businesses under their current brand names, the AP reports. It will be headquartered in the northwestern Chicago suburb of Hoffman Estates, where Sears has its headquarters, but will maintain a “significant presence” in Troy, Mich., where Kmart is based.

Kmart chairman Lampert will be the chairman of Sears Holdings, while Sears CEO Alan Lacy will be vice chairman and CEO of the new company, the AP reports. The new 10-member Sears Holdings board will have seven members from Kmart and three from Sears.

“The merger will enable us to manage the businesses of Sears and Kmart to produce a higher return than either company could achieve on its own,” Lampert said in a news release.

Lampert, Kmart’s majority shareholder, is also Sears’ largest shareholder, holding a 15% stake in Sears through his ESL Investments Inc., the AP reports

The merger, expected to close by the end of March 2005, is subject to approval by Kmart and Sears shareholders, regulatory approvals and customary closing conditions.

Kmart filed for Chapter 11 bankruptcy protection in early 2002, leading to the closing of about 600 stores, termination of 57,000 Kmart employees, and cancellation of company stock. The retailer emerged from bankruptcy in May 2003 and in March posted its first profitable quarter in three years.

Mired in a retail slump, Sears had long fallen out of favor on Wall Street after losing ground to competitors and enduring sluggish sales for years. The company last fall introduced its Sears Grand stores, which offer grocery and convenience items besides traditional Sears fare such as clothing, home appliances, and tools. The concept had delivered promising results for the struggling retailer at its first three stores in metropolitan Salt Lake City, Las Vegas, and Chicago, in the suburb of Gurnee.

Kmart, in recent years, has been shedding many of its underperforming stores, a strategy that has helped the once-struggling discount retailer bounce back after it emerged from bankruptcy. Kmart recently agreed to sell 50 stores to Sears for $575 million as part of that strategy.

Kmart’s earnings have been improving. On Wednesday, Kmart posted net income in the third quarter ended Oct. 27 of $553 millioncompared with a loss of $23 millionfor the same period a year ago.

Its stock price has risen nearly seven-fold to $101.22 on Tuesday from $15 a share when it emerged from bankruptcy.

In recent weeks, it appeared that Sears could be shifting toward a similar real estate strategy after the disclosure that Vornado Realty Trust, a real estate investment trust, had purchased a 4.3% interest in the department-store chain. That move left the impression that the value of Sears’ real estate holdings may be not be fully reflected in its stock price. Since that Nov. 5 announcement, Sears’ stock has jumped 25 percent. It closed at $45.20 in trading Tuesday on the New York Stock Exchange.

Company officials said the merger would help make their properties more profitable through a broader retail presence and improved operational efficiency in areas such as procurement, marketing, information technology and supply chain management.

“The combination will greatly strengthen both the Sears and Kmart franchises by accelerating the Sears off-mall growth strategy and enhancing the brand portfolio of both companies,” Lacy said. “This will clearly be a win for both companies’ customers while significantly enhancing value for all shareholders.”

The merger will not affect agreements to carry home and fashion lines including Martha Stewart Everyday, Lands’ End, and Sesame Street, the companies reportedly said.

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