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Despite its woes, May still operates efficiently, with a 16 percent SG&A, whereas Federated is about 27 percent. EBITDA rates of the two retailers are close, in the 14 percent range.
Investment bankers said that at a $36 price and a 100 percent stock transaction, there would be a 16 percent dilution, excluding the impact of synergies. A 50 percent stock and 50 percent cash transaction would have a 6.4 percent dilution, but with more impact on the balance sheet.
However, by combining both companies, plenty of synergies would be attained through the elimination of May’s St. Louis corporate headquarters, as well as regional headquarters for May’s divisions, and increased buying power. One former Federated executive said Field’s has been operated poorly for some time and that’s where Federated would have plenty of room for improvement with sales and margins.
“The problem is the higher the premium that Federated pays, the higher the dilution is going to be for Federated shareholders, and more debt will be on the balance sheet,” said Gilbert Harrison, chairman of Financo Inc. “The price depends on the synergies Federated expects to realize in this transaction, but certainly the merger would give the combined company a national presence and ability to stamp the Macy’s and Bloomingdale’s nameplates on stores nationwide.
“Of the 458 department stores that Federated operates and the 444 stores operated by May, May has 129 in the Midwest, whereas Federated has 30 stores there. That would be a major benefit for Federated. Another major benefit would be in the central states, where May has 21 stores and Federated has one.”
Harrison speculated that Federated would let Lord & Taylor continue to stand alone, and convert the rest of May’s stores, including Marshall Field’s, to Macy’s and Bloomingdale’s. “If you believe the vision that Terry Lundgren [Federated’s chairman, president and ceo] has for Federated, as much as he believes that Marshall Field’s is a good name, he has to be convinced that the Macy’s imprint is best for the combined companies, especially given the strength in national advertising and the nearly 100 percent geographic presence in all states that comes out of it.”