10:43 AM EST on Tuesday, March 1, 2005

BY JOHN NOLAN
Associated Press

CINCINNATI -- Federated Department Stores Inc. announced yesterday that it is buying rival May Department Stores Co. for $11 billion in cash and stock in a deal that would create a powerhouse better able to compete against discounter Wal-Mart Stores Inc. as well as upscale merchants.

The deal would bring together the operator of Macy's and Bloomingdale's with May, a company known for its Marshall Field's, Filene's and Lord & Taylor chains, creating a company with nearly 1,000 department stores and $30 billion in annual sales.

Under the deal, each share of May will be converted into the right to receive $17.75 per share in cash and 0.3115 of a share of Federated stock. Based on the 10-day trading average of Federated stock as of last Friday, that equates to $35.50 per share, or $11 billion.

Federated said it will assume May debt that totaled about $6 billion at the end of 2004.

May shares fell 84 cents, or 2.4 percent, to close at $34.51 in trading on the New York Stock Exchange yesterday. Its stock has been rising in recent weeks in anticipation of a deal. The stock has ranged in price from $23.04 to $36.48 during the past year.

Federated shares initially rose $1.21 to $58 yesterday morning, but later fell 34 cents, or 0.6 percent, to close at $56.45. Federated has traded between $42.80 and $59.91 the past year.

Federated chairman, president and chief executive officer Terry Lundgren said the deal would give Federated a presence across the country, adding key markets such as Chicago, Denver, Minneapolis and St. Louis.

By doubling in size, the combined company would be able to roll out national marketing initiatives, expand the best store-label merchandise collections of both companies and implement some of Federated's successful store initiatives, such as larger fitting rooms, to May's department stores. The merger is also expected to wield more clout with vendors.

Federated would not say how many jobs would be cut because of the merger or what the company would do in cases where it and May have stores in the same mall. The company wants to hear what government regulators say about whether and how many of the overlapping stores will have to be closed, Lundgren said.

THE COMBINED COMPANY would have about 950 department stores and an additional 700 bridal and formal wear stores. It would operate in every state except Alaska, along with Guam, Puerto Rico and the District of Columbia.

Department stores have been losing sales in part because young people regard them as the places where their parents shopped, retail-industry analyst Kurt Barnard said.

He said Lundgren has driven Federated to reach out to young people with merchandise that appeals to them, an approach that Federated can use for May's stores.

"It is working," Barnard, the president of Barnard's Retail Consulting Group, said from Nutley, N.J. "We are seeing younger people flocking to the [Federated] department stores."

Still, Federated could face a big challenge in revitalizing May, whose sales have slipped, according to Bob Buchanan, an analyst with A.G. Edwards & Sons Inc. "It is not going to be easy to turn that around," he said.

Federated already is spreading the Macy's name to its regional department-store groups, meaning that names including Lazarus, Rich's and Burdines will disappear this month.

Lundgren said Federated doesn't plan to change May store names before 2006, but then will rename its stores -- and even some Bloomingdale's stores -- as Macy's. That means May store names including Filene's, Foley's, Hecht's and Kaufmann's could disappear next year.

The extension of the Macy's name would take advantage of its fame and would also allow Federated to expand use of Macy's credit cards and become a national advertiser, Lundgren said. The combined company would be in the nation's top 65 markets except Jacksonville, Fla.

THE MERGER is the latest consolidation in the department store industry, particularly the mid-tier sector as companies seek to reduce total advertising spending and other costs while gaining bargaining power with suppliers. In November, Kmart Holding Corp. agreed to buy Sears, Roebuck & Co. for $11.5 billion.

And there may be more dealmaking in the offing. Saks Inc. may sell or spin off its middle-market department store division to concentrate on its Saks Fifth Avenue unit, which targets the luxury market, one of the hottest areas in retailing. It is expected to make a decision in a few weeks.

Federated's takeover of St. Louis-based May is subject to regulatory and shareholder approval. The companies hope to close the deal in the third quarter this year.

Federated said it expects the merger to improve profits beginning in 2007. The company said it anticipates $450 million in cost savings by 2007 from combining purchasing and other central functions, integrating divisions and adopting best practices from both companies.

Federated said it expects one-time merger costs of about $1 billion, to be spread over three years starting in 2005.