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Federated-May Merger: With a Deal Imminent Market Weighs Fallout

Merger talks between Federated and May continued over the weekend, with both boards in New York. The firms are said to be close to a deal.

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Federated’s Macy’s division is likely to take over May’s nameplates.

Photo By Meredith Derby, Kyle Samperton and Ed Mackinnon

NEW YORK — The Federated-May nuptials appear to be set.

The boards of Federated Department Stores and May Department Stores hashed out remaining differences over the weekend, and barring any last-minute hitches, an announcement of the merger is expected today, according to sources.

The merger will reshape the American department store landscape, creating a $30 billion giant with about 1,000 stores. It’s also likely to accelerate the rush to greater scale among Federated’s competitors and suppliers, spurring further mergers further mergers or deals between stores and vendors. The ripples are likely to be felt for years to come, from the store floor to factories in the Far East.

Large job losses are likely, certainly within May, and Federated’s management will face the challenge of turning around a May operation that has stagnated for years.

For weeks, the price of a deal has been the sticking point between the two companies, with Wall Street analysts and investment bankers indicating late last week that Federated should not pay much above the May stock price, which closed at $35.35 on the New York Stock Exchange on Friday. Although, details of the deal could not be learned, if Federated paid between $35 and $36 a share the deal would be worth $10 billion to $11 billion, excluding debt.

Wall Street analysts argued that Federated wouldn’t pay much of a premium, considering May is in a weak bargaining position. It’s already highly leveraged, having bought Marshall Field’s for $3.2 billion last year from Target Corp.; profits and comparable-store sales over the last several years have been weak, and there’s literally a lack of leadership following the resignation of Gene Kahn last month as May’s chairman and chief executive.

Other issues negotiated this weekend could have included the composition of a combined board, the fate of May’s St. Louis headquarters, severances and contracts of key executives, and store dispositions. There is a 20 to 25 percent overlap in locations between Federated and May, and retail analysts predict that as many as 100 to 150 May units might be sold off.

“If both boards are in town, they’ve got to have some sort of understanding already,” said retail analyst and consultant Walter Loeb. “May has not shown the ability lately to grow, or put the numbers together, but the leadership of Federated will help May. It’s also difficult for them in this environment to find new management.” 

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