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.

Emanuel Weintraub, of the consulting firm that bears his name, said if this deal “isn’t a long-haul, retail consolidation, but a platform for a real estate play, then the move is brilliant, and Lampert is a true genius.”

Investment banker Gilbert Harrison of Financo cautioned, “This is a very interesting merger because it creates a retail giant, but one where the downside is protected by its real estate. Whether you call it a real estate investment trust using their own real estate or whatever rationale you want to call it, if Sears and Kmart are going to be in business 10 or 20 years from now, there still has to be a retail rationale that continues.”

Under the new structure anticipated following the merger, Lacy will be vice chairman and ceo of Sears Holdings. Aylwin B. Lewis, the newly appointed president and ceo of Kmart, will become president of Sears Holdings and ceo of Sears Retail. Glenn Richter, executive vice president and chief financial officer of Sears, Roebuck, will retain those titles in the new Sears Holdings.

Meanwhile, Standard & Poor’s Ratings Services issued an update of its ratings of Sears, which was placed on CreditWatch last month, and said that Sears’ ratings would likely fall to “BB” category following the Kmart merger.

Gerald Hirschberg, S&P analyst, said that that “BB” rating is the “first full category of below-investment grade.” According to S&P, the merger represents an opportunity for Sears to accelerate its off-the-mall initiative by converting existing Kmart stores into Sears Grand units, but the strategy is still in its infancy and had yet to demonstrate success.

“The business risk in both companies is that neither is doing well, nor had done well for quite a long time, despite efforts by management at both firms. When we look at the business of each company, and then put them together, we don’t get to investment grade,” the S&P analyst said.

Fitch Ratings placed Sears on Rating Watch Negative, noting that after the merger the ratings could be downgraded two notches from where they are currently.
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