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M&As Affect Vendor Positions Differently

NEW YORK — Compared with the recent merger of Federated Department Stores and May Department stores, factors believe the sale of Neiman Marcus Group should have little impact on vendors. That is, unless Federated or another direct competitor...

NEW YORK — Compared with the recent merger of Federated Department Stores and May Department stores, factors believe the sale of Neiman Marcus Group should have little impact on vendors. That is, unless Federated or another direct competitor gets into the mix.

At the heart of the matter, for factors, is the fact that large-scale mergers often result in their vendor clients having their sales concentrated in one retailer. This translates into an increased risk should the retailer run into problems.

Concentration issues shouldn’t be a problem when it comes to Neiman Marcus, though, said several of the factors, simply because it is not as large a player as a Federated or May.

“Right now there’s really no implication until we know who’s going to buy them,” said Thomas Pizzo, president and chief executive officer of Wells Fargo Century. “I can’t see any weak company buying them, so I don’t see anything negative that can come out of it.”

David Milberg, president of Milberg Factors Inc., believes the motivation to sell might have been based on a mix of timing and an acknowledgment of the consolidation happening around them. 

“My guess is that Neiman Marcus is noticing a couple of things,” said Milberg. “One, the luxury business has been strong and two, there is this continued trend toward consolidation. I imagine both those things are weighing on their minds.”

But Milberg and others in the apparel industry are betting that Neiman’s will be scooped up not by another retailer, but by a financial company.

Either way, according to Michael Stanley, executive vice president at Rosenthal & Rosenthal, the merger of two strong companies insures that factors can continue to offer credit to vendors that sell to those retailers. “In the case of Federated and May, the combined effort is going to be strong, it’s not going to deteriorate the credit status because it’s got the wherewithal,” said Stanley.

Still, Neiman’s merging with another retailer could create more issues for vendors.

“I think what would make the biggest difference with Neiman’s would be if a Saks or a Nordstrom were to merge with it; the stores that tend to compete more with Neiman Marcus,” said Milberg. “That’s where the [vendors] will feel the leverage of the consolidation play. It really depends on whether they merge with a direct competitor or not.”

This story first appeared in the March 21, 2005 issue of WWD.  Subscribe Today.

The greater leverage retailers gain through a merger is of particular concern to factors.

“I continue to believe that from the [vendors’] perspective, consolidation of retailers just makes it tougher to do business and gives retailers more leverage,” said Milberg.

The merger between Federated and May is already expected to catalyze a change in the landscape of many malls across the nation. In nearly 100 malls in the U.S., the overlap of Federated and May store anchors will lead to a handful of Bloomingdale’s conversions, and more importantly, a healthy dose of store closings.

An analysis of the overlap by WWD revealed markets in Southern California, New Jersey and Philadelphia to be the likeliest targets for real estate investment trust companies to take back anchor stores. The analysis showed that, in the densest area of concentration, a merged Federated-May entity would operate more than one anchor store in 29 different regional malls in Southern California. The most common overlap in this market is Macy’s and Robinsons-May. In some malls, such as Fashion Island in Newport Beach, it would operate three anchors.

In New Jersey, the market with the next-highest level of overlap, there are nine malls with both Federated and May stores, mostly Lord & Taylor and Macy’s nameplates. In Philadelphia, seven malls overlap department stores, and in Boston, seven malls. Although preliminary terms of the merger deal indicate that most, if not all, of May’s nameplates nationally will be converted to Macy’s stores, in the majority of the malls with both Federated and May stores, a Macy’s nameplate already exists.

Stanley doesn’t believe store closings spells doom for vendors. “Other people are going to step into the space,” noted Stanley, who went on to say that consumers have shown themselves to be more willing to go to larger stores rather than specialty stores for some time now.

“When mergers happen, sometimes the vendors go crazy worrying about what’s going to happen,” said Stanley. “Well, the stores still needs merchandise.”

Pizzo agrees that closing stores will ultimately be for the benefit of the company and the vendor. “If they close stores it has to be beneficial for the buying company,” said Pizzo.

“This is very much a Darwinian retailing world that we live in,” said Arthur Coppola, president and chief executive officer of the Macerich Co., which owns 63 malls nationally. “There are many, many department stores that have been consolidated amongst themselves and the net result for us is that our shopping centers overall have become stronger. Frankly, the barriers to entry [for development] have become higher because there are fewer department stores to fuel new centers, which therefore makes existing centers more scarce, drives up the values and drives up the rents.”

Despite increased comfort with concentration levels, most factors would prefer that their clients have more retailers to sell to rather than fewer. “If another department store buys [Neiman Marcus], our clients have one less customer to sell to,” said Pizzo. “From a credit point of view, it depends on how good the credit is on the company that buys them.”