Federated to buy May for $11 billion

Federated Department Stores, which owns Macy’s and Bloomingdale’s, agreed yesterday to buy May Department Stores, which owns Lord & Taylor and Marshall Field’s, for about $11 billion, executives involved in the negotiations told The New York Times.

The deal, which is expected to be announced today, would transform Federated, already the nation’s largest department store company, into a retailing giant with more than 1,000 stores and $30 billion in sales.

The transaction is the latest retail merger in an industry that is rapidly being redrawn as the traditional department store faces mounting pressure from rivals on all sides: discount giants like Wal-Mart and Target, specialty stores like Gap and Victoria’s Secret and upscale retailers like Neiman Marcus and Nordstrom.

Federated’s deal with May is a long time in the making, the Times reports. Two and half years ago, the companies held talks but failed to reach an agreement after a dispute over which executives would run the combined company. Last month, May’s chief executive, Gene Kahn, was ousted by the company’s board, which created an opening for Federated to resume negotiations.

The companies have been negotiating off and on for several weeks, the executives reportedly told the Times, and a deal was approved by both company boards over the weekend.

The deal is subject to approval by regulators, who are not expected to block the transaction, but may press Federated to sell stores in cities in which it has a stronghold.

Analysts told the Times that Federated, based in Cincinnati, will probably close a significant number of May’s underperforming locations, perhaps as many as 200 stores. Federated may also give the Macy’s name to many of May’s regional stores, discarding the familiar names that have been known to generations of shoppers in those areas. Besides Lord & Taylor and Marshall Field’s, which are likely to go untouched, May owns Famous-Barr, Filene’s, Foley’s, Hecht’s, Kaufmann’s, Meier & Frank, Robinsons-May and Strawbridge’s, among others.

“Together, using the Macy’s name, a powerful national franchise could be established,” Bernard Sosnick, an analyst at Oppenheimer & Company recently wrote in a note to investors. “This, we believe, is the compelling force behind a possible merger between the two, along with cost reductions due to the elimination of redundant activities.”

Thousands of layoffs are also expected, although other merchants, including Kohl’s, J.C. Penney, and Nordstrom, are reportedly already lining up to take over some of the locations that Federated may jettison, the Times reports.

May, which is based in St. Louis, is expected to keep some offices there, but there will be layoffs.

Some analysts worry that the deal is marrying two companies facing critical challenges. “There may be back-office synergies,” Joshua R. Goldberg, a managing director of Mercantile Capital Partners, a private equity firm in Manhattan, said last week. “But will a combined May-Federated be more attractive and effective with customers than each is now?”

Still, Terry J. Lundgren, Federated’s chief executive, has received high marks for being a disciplined executive, refusing to overpay for acquisitions. When Marshall Field’s came up for sale in the last year, he walked away and let May buy it when he thought the asking price had become too high.

And in his negotiations to buy May, Lundgren was similarly tough, the Times reports. While May’s board had been holding out for more than $40 a share, he was able to talk them into selling for $35.50 a share in cash and stock, executives involved the process said. Shares of May closed on Friday at $35.35. When Mr. Kahn stepped down, before speculation began swirling about talks with Federated, May’s shares traded at $27.84. Federated is also expected to assume about $6 billion in debt. May was in a tough position, analysts say, but there no other natural buyers.

Same-store sales for Federated grew by 2.6% last year. May, which has not had sales growth for four years, had a same-store sales loss of 2.4% last year.

In acquiring May, Federated will have to decide how May’s 501 department stores and more than 700 specialty stores like the David’s Bridal chain will fit into the merged company.

The new company is expected to wring hundreds of millions of dollars in savings, which Lundgren is expected to outline today, the Times reports.

To pay for the acquisition, most retailing specialists say Lundgren will sell one or both of the company’s credit card operations, the Times reports. Over the weekend, they also were speculating that Mr. Lundgren was likely to shed David’s Bridal, the successful wedding apparel chain. May also owns After Hours Formalwear and Priscilla’s of Boston, an upscale wedding gown retailer.

There’s also new speculation that Nordstrom had put in a request for Lord & Taylor’s grand Fifth Avenue flagship, the Times reports.