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Retail Giants To Merge

Federated Department Stores Inc. is buying rival May Department Stores Inc. for $11 billion in cash and stock in a deal that would create a retailing giant better able to compete against Wal-Mart Stores Inc. and other discount chains.

The deal announced Monday would bring together the operator of Macy's and Bloomingdale's with May, a company known for its Marshall Field's and Lord & Taylor chains, creating a company with 1,000 stores and $30 billion in annual sales.

The merger comes as retailers look to consolidate to reduce advertising and other costs while gaining bargaining power with suppliers. Just last November, Kmart Holding Corp. agreed to buy Sears, Roebuck & Co. for $11.5 billion.

Federated's purchase of May will extend Federated's 34-state retail operation into a total of 49 states, along with Guam, Puerto Rico and the District of Columbia.

"Today, we have taken the first step toward combining two of the best department store companies in America, creating a new retail company with truly national scope and presence," said Terry J. Lundgren, Federated's chairman, president and chief executive officer.

Under the deal, each share of May will be converted into the right to receive $17.75 per share in cash and 0.3115 shares of Federated stock. Based on the 10-day trading average of Federated stock as of last Friday, that equates to $35.50 per share, or $11 billion.

Federated also said it will assume May debt that totaled about $6 billion at the end of 2004.

"It's all winners. This deal is good for shoppers. It will result in better fashions and sharper price points," said retail industry expert Burt Flickinger, managing director at Strategic Resources in New York.

Federated and St. Louis-based May have discussed a possible merger on and off for a couple of years, but speculation heated up when May Chief Executive and Chairman Gene Kahn abruptly left in January. That cleared the way for Federated Chairman and CEO Terry Lundgren to head the combined entity.

May stock has been rising in recent weeks in anticipation of a deal, including the 4 percent jump Friday. The stock has ranged in price from $23.04 to $36.48.

Federated shares closed at $56.79 on Friday, near the upper end of its 52-week range of $42.80 to $59.91.

May's performance has lagged behind competitors such as Federated and J.C. Penney Co. as it has failed to come up with a compelling merchandising vision under Kahn and has consequently resorted to aggressive price cutting to bring in customers.

May is given credit for its warehouse and distribution operations, while Federated has done a good job in upscaling Bloomingdale's.

Some analysts have suggested that uniting two of the nation's largest department store chains would create a more efficient operation better equipped to go up against discounters. Together, the companies also could wring savings out of their merged retail systems and buying clout, some analysts suggested.

Others questioned whether the two retailers would be a good fit, citing the belief that Federated may be more upscale and May always margin-oriented while lacking on the merchandising side.
By John Nolan

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