The $55B Baby: Retail Landscape Shifts as Kmart Buys Sears

Kmart Corp.’s purchase of Sears makes it the second-largest U.S. apparel retailer and puts its new chairman, Edward Lampert, in the spotlight.

Part of the plan is for Kmart stores in big-box locations to be possibly converted to Sears Grand stores, and maybe have Sears merchandise in Kmart stores, according to Alan J. Lacy, chairman and chief executive officer of Sears Roebuck who will be the vice chairman and ceo of Sears Holdings.

Lacy said during the call, “The savings will be fully realized by the end of the third year, and be accretive in the first year excluding one-time costs. [We are] taking the best from both cultures.” Lacy added that the merger, with cross-selling of proprietary brands, can help Kmart “be even more differentiated.”

But even Lampert appeared to recognize the challenges. In a conference call Wednesday, he said the merger is an “enormous undertaking” and the path ahead as a “lumpy progress over time.”

“Scale is very important to compete effectively….We need to have a very low-cost structure to compete with competitors, with the reputation and quality of service that we at Kmart aspire to achieve,” he added.

Kmart shareholders will receive one share of new Sears Holdings common stock for each Kmart share. Sears stockholders can elect either $50 in cash or 0.5 shares of the new entity for each Sears, Roebuck share. The transaction is expected to be tax-free to Kmart shareholders, and to Sears stockholders to the extent that they receive stock. Sears Holdings is valued at $50.61, the price of Sears stock at its close at the end of trading on Tuesday.

On paper, the deal appears to be a gamble for Lampert. The value of his holdings in Kmart and Sears prior to the merger, calculated from the most recent Securities and Exchange Commission filings, is about $8.79 billion. Converting his existing shares of the new company leaves Lampert with a stake in the merged company worth $4.49 billion. Analysts did not speculate yet on the share value of Sears Holdings, or whether it would reach Kmart Holding levels of more than $100. Analysts’ reactions were mostly critical, although there were some praises.

“Putting aside the question of whether the combination of Sears and Kmart will be a successful investment, the retail underpinnings of putting these two chains together appear challenging,” said George Strachan and Adrianne Shapira, analysts at Goldman Sachs, in a research note after the market closed.
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