Merging Kmart and Sears will give rise to a company named Sears Holdings Corp. that will rank as the third-largest U.S. retailer, with approximately $55 billion in annual revenue as well as a footprint of nearly 3,500 retail stores, reports CBS MarketWatch. There are 2,350 full-line and off-mall stores, and 1,100 specialty retail stores.
The Sears and Kmart businesses will continue to operate separately under their respective brand names. Still, some analysts speculate Sears Holdings may close some locations and even swap some locations.
Mired in a retail slump, Sears had long fallen out of favor on Wall Street after losing ground to competitors and enduring sluggish sales for years. The company last fall introduced its Sears Grand stores, which offer grocery and convenience items besides traditional Sears fare such as clothing, home appliances and tools. The concept had delivered promising results for the struggling retailer at its first three stores in metropolitan Salt Lake City, Las Vegas and Chicago, in the suburb of Gurnee.
Kmart, in recent years, has been shedding many of its underperforming stores, a strategy that has helped the once-struggling discount retailer bounce back after it emerged from bankruptcy. In fact, Kmart has sold 50 stores to Sears for $575 million as part of that strategy.
"The negative view is that it's akin to tying two drunks together and hoping that they'll be able to walk a straight line," retail analyst Sean Egan is managing director of Egan-Jones in Haverford, Pa., told CBS Radio News. "Kmart and Sears have been out-maneuvered by Wal-Mart. The hope is that with the greater critical mass they'll be able to do better against Wal-Mart."
The announcement followed a published report indicating Kmart chairman Edward Lampert might soon significantly increase his stake in Sears in a move to possibly merge the companies.
Lampert's investment company, ESL Investments Inc., owns a 52.6 percent stake in Troy, Mich.-based Kmart. ESL is also Hoffman Estates, Ill.-based Sears' largest shareholder, with a roughly 15-percent stake.
Sears has been suffering from the nationwide decline of shopping malls and, unlike rivals such as Target, has failed to adapt to changes in customer preferences.
Sears stock shot up earlier this month after Vornado Realty Trust disclosed it had purchased a 4.3-percent interest in the department-store chain. Experts say opportunistic investors like Lampert or Vornado Chairman Steven Roth might be able to make more money by selling Sears' poorly performing but well-located stores to other retailers.
Lampert already has experience in selling off Kmart properties. Shares of Kmart have more than tripled this year as Lampert sold 50 stores to Sears for $575 million and 18 stores to Home Depot Inc. for $271 million.
The merger is expected to close by the end of March 2005. Terms call for Sears stockholders to have the right to elect payment of $50 in cash or 0.5 share of Sears Holdings, valued at $50.61 based on Tuesday's $101.22 closing for Kmart shares, for each of their Sears shares. On a prorated basis, 55 percent of outstanding Sears shares will be converted into Sears Holdings shares and 45 percent will be converted into cash. Kmart stockholders will get one share of Sears Holdings common stock for each of their Kmart shares.
Lampert will serve as chairman of Sears Holdings, while Alan Lacy, Sears' chairman and chief executive, will become vice chairman and CEO. Aylwin Lewis, currently president and CEO of Kmart, will be president of Sears Holdings and CEO of Sears Retail.
The three executives will also make up an Office of the Chairman that Sears Holdings will establish, supported by a 10-member board of directors. Seven members of Kmart's board will sit on the Sears Holdings board, along with three members of Sears' board.
"The combination of Kmart and Sears is extremely compelling for our customers, associates and shareholders as it will create a powerful leader in the retail industry, with greatly expanded points of distribution, leading proprietary home and apparel brands and significant opportunities for improved scale and operating efficiencies," Lambert said in a statement.
"It's the best marriage available," said Egan. "Even after they merge, they're going to continue to have difficulty with, of course, Wal-Mart because of its greater size and its greater efficiency."
Kmart Wednesday also said it swung to a fiscal third quarter profit of $553 million through a reduction in store payroll and reductions in newspaper advertising, with sales falling 13.7 percent to $4.4 billion and same-store sales declining 12.8 percent. Kmart expects to end the year with over $3.1 billion in cash.
"These are two fantastic brand names and it will be very interesting to see what happens over the next couple of years," added Egan.