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Kmart, Sears Joining Forces

The discounter Kmart Holding Corp. is acquiring one of the most venerable names in U.S. retailing, the department store operator Sears, Roebuck & Co., in a surprise $11 billion deal that will create the nation's third largest general merchandise retailer.

The combined company under Wednesday's deal would be known as Sears Holdings Corp., but it was clearly orchestrated by Kmart chairman and Sears shareholder Edward Lampert who will lead a new board that will be dominated by Kmart directors.

Shares of both companies surged on news of the deal.

The deal marks a remarkable comeback for Kmart, a company once known for its "Blue Light Specials," that scaled back its operations after seeking bankruptcy protection in 2002. Sears' roots date to the late 1800s when it offered merchandise by mail order to farmers, opened its first retail store in 1925 and eventually became the nation's biggest department store operator.

The new company is expected to have $55 billion in annual revenues and 3,500 outlets. That will mean it will trail only Wal-Mart Stores Inc. and Target Corp. among the biggest U.S. general merchandise retailers.

"If I were today Target or Kohls, I would be quaking in my booties because, from the way I read it, both companies will be 'targeted,'" Kurt Barnard of Barnard Retail Forecasting Consulting Group told CBS Radio News. "It is a dream deal made in heaven."

The new company plans to operate the Kmart and Sears businesses under their current brand names.

It will be headquartered in the northwestern Chicago suburb of Hoffman Estates, where Sears has its headquarters, but will maintain a "significant presence" in Troy, Mich., where Kmart is based.

Under the agreement, which was unanimously approved by both companies' boards of directors, Kmart shareholders will receive one share of new Sears Holdings stock for each Kmart share. Sears, Roebuck shareholders can choose $50 in cash or half a share of Sears Holdings stock. That portion of the deal values Sears shares at $11 billion, a 10.6 percent premium over its value at Tuesday's close.

Kmart chairman Lampert will be the chairman of Sears Holdings, while Sears CEO Alan Lacy will be vice chairman and CEO of the new company. The new 10-member Sears Holdings board will have seven members from Kmart and three from Sears.

"I think it puts us in an awesome position to be super competitive in a big box setting and really dominate in this American retail space," Aylwin Lewis, Kmart president and chief executive, told a conference call. He will become president of Sears Holdings and chief executive officer of Sears Retail.

"The combination of the best of both companies in a big box setting will allow us to be tremendously competitive," Lewis said.

"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, 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."

Lampert, Kmart's majority shareholder, is also Sears' largest shareholder, holding a 15 percent stake in Sears through his ESL Investments Inc.

The merger, expected to close by the end of March 2005, is subject to approval by Kmart and Sears shareholders, regulatory approvals and customary closing conditions.

In the past three years, Kmart has filed for bankruptcy, closed about 600 stores, terminated 57,000 employees and canceled company stock. The retailer emerged from bankruptcy in May 2003 and in March posted its first profitable quarter in three years.

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.

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. Kmart recently agreed to sell 50 stores to Sears for $575 million as part of that strategy.

"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."

Its stock price has risen nearly seven-fold to $101.22 on Tuesday from $15 a share when it emerged from bankruptcy.

In recent weeks, it appeared that Sears could be shifting toward a similar real estate strategy after the disclosure that Vornado Realty Trust, a real estate investment trust, had purchased a 4.3 percent interest in the department-store chain. That move left the impression that the value of Sears' real estate holdings may be not be fully reflected in its stock price. Since that Nov. 5 announcement, Sears' stock has jumped 25 percent. It closed at $45.20 in trading Tuesday on the New York Stock Exchange.

Company officials said the merger would help make their properties more profitable through a broader retail presence and improved operational efficiency in areas such as procurement, marketing, information technology and supply chain management.

"The combination will greatly strengthen both the Sears and Kmart franchises by accelerating the Sears off-mall growth strategy and enhancing the brand portfolio of both companies," Lacy said. "This will clearly be a win for both companies' customers while significantly enhancing value for all shareholders."

"These are two fantastic brand names and it will be very interesting to see what happens over the next couple of years," said Egan.

The merger will not affect agreements to carry home and fashion lines including Martha Stewart Everyday, Lands' End and Sesame Street, the companies said.