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Macy’s Reply To Federated: ‘Not For Sale’

NEW YORK -- R.H. Macy & Co. is giving Federated Department Stores the cold shoulder.<BR><BR>Federated took the first step toward taking over Macy's when it bought a significant stake of Macy's secured debt on Friday. But Macy chairman and chief...

NEW YORK — R.H. Macy & Co. is giving Federated Department Stores the cold shoulder.

Federated took the first step toward taking over Macy’s when it bought a significant stake of Macy’s secured debt on Friday. But Macy chairman and chief executive officer Myron E. Ullman said Monday, “The company is not for sale and neither are its pieces.”

Ullman met Monday with Allen Questrom, Federated’s chairman and ceo; James Zimmerman, Federated’s president, and Ronald Tysoe, vice chairman and chief financial officer of Federated, at Macy’s headquarters here.

Although nothing decisive happened at the meeting, it seemed that both sides came away with different reactions.

Zimmerman said, “We left with the clear understanding that we’d be talking again. It was a good start in working together. It was cordial, positive and productive.”

Even though many of the chain’s investors and creditors seem to welcome the Federated move, Ullman said no plans have been set for another meeting, and that Macy’s priorities have not changed.

“I expressed to them that we have a business plan that has been accepted by creditors and that we are discussing a plan for reorganization,” he said.

Over the weekend, Federated paid $449.3 million for 50 percent of the secured claim of Macy’s largest creditor, Prudential Insurance Co. of America. The claim is backed by mortgages on 70 of Macy’s 110 department stores. Federated also has an option to acquire the other half of the $1 billion claim within three years.

In a coolly worded statement, Macy’s referred to Federated only as a “creditor,” and said it would continue to work with all creditors on a consensual plan. “We view Federated as a creditor holding a portion of Prudential’s claim,” the statement said.

With a position as a fully secured creditor, Federated would not automatically have much of a say in Macy’s Chapter 11. However, if it can convince other creditors that a stake in a combination of Federated and Macy’s would be much more valuable than just an interest in Macy’s, it could win enough support to take over the company, according to analysts.

Some speculate that Federated might throw some or all of its claim into the Macy’s pot to provide working capital in the post-Chapter 11 period or accept a large equity piece in place of payment of its claim.

Federated’s major card in this game would be the promise of synergies in the combined companies.

One analyst estimated that Macy’s cash flow could rise by as much as $200 million through savings from a merger with Federated.

Federated said it initiated discussion with Prudential in the fall, but one source close to the situation said Questrom has had his eye on Macy’s since Federated emerged from Chapter 11 in the beginning of 1992. But while Macy’s may view Federated as a gate-crasher, the action is getting a warm welcome from investors and Macy’s creditors.

On Monday, all three classes of Macy’s publicly traded bonds rose sharply, as did the offering price for claims against Macy’s. Federated stock gained 2 to 22 3/4 on the New York Stock Exchange.

“We welcome the offer, especially one with deep pockets,” said Peter J. Solomon, an adviser to Macy’s unsecured creditors’ committee. “Macy’s has no imminent prospect of emerging from Chapter 11.”

Solomon, a veteran in retail mergers and acquisitions, added: “It’s a very logical step. The department store business is not growing and, therefore, consolidation will have to occur.

“It has been clear to me for a while that Macy’s was not going to be a survivor in its present form. Ed Finkelstein [former Macy’s chairman and chief executive officer] knew it as far back as the Eighties, when he attempted to merge the business. Sales aren’t growing, so there [are] only so much economies of scale.”

One Macy creditor said he thinks Federated’s entrance into the fray — hostile or friendly — could be a boon to all creditors and noted it could quicken Macy’s departure from bankruptcy proceedings.

“If he involves himself, Tysoe could be the catalyst needed to get the process rolling,” the source noted.

He credited Tysoe with being the architect behind Federated’s rapid two-year trip through Chapter 11. The source noted that Federated-Macy’s would be a good fit.

“Macy’s is trying to become a national brand, while Federated has a regional image through its department stores,” he said.

He said one thing that should be expected in any merger would be store closings, pointing to Federated’s closing of 24 Florida locations and the merging of the Maas Bros. and Burdines operations during the end of Federated’s Chapter 11.

Jerome Chazen, chairman of Liz Claiborne, said, “I would have concerns about some competing doors which might close” as a result of a Macy’s/Federated combination. But he added that the link could produce an unusually viable financial entity, better serving all manufacturers.

Raz Kafri, a high-yield bond analyst at Grantchester Securities, said: “It’s great news to both Federated and Macy’s because there’s a lot of synergy. Federated knows how to run a business and can take Macy’s 4 percent EBITDA margins up to Federated’s 10 percent level.”

Kafri added: “Federated can add significant value to Macy’s cash flow from cost cutting.”

Jack Hersch of M.J. Whitman said Macy’s still controls its destiny under bankruptcy law, but noted that Federated could launch a tender offer for unsecured claims if it is unable to strike a deal with Macy’s management.

“One of two things has to happen, either Macy’s management will do something with Questrom or Questrom has to get Macy’s creditors to agree with him,” said Hersch.

“Macy can in theory freeze Federated out through exclusivity, but in reality Questrom will work until he gets a return on his investment, and that’s through convincing creditors that his plan is better for them or by making a tender offer for claims,” Hersch added.

Under bankruptcy law, only Macy’s has the right to file a reorganization plan. The exclusive period is set to expire in March, but sources expect Macy’s to ask for court approval to extend the deadline.

In the factoring community, executives said the purchase would not have any impact on the credit-worthiness of either company, and some saw it as a positive sign for Macy’s.

“It’s definitely a plus, because it shows that another major retail corporation has strong confidence in Macy’s future,” commented Joseph Grimaldi, president of BNY Financial, one of the two largest factors in the country.

Another factoring executive, who declined to be identified, said that for a creditor of Macy’s, the purchase could be a plus because it might mean a better Chapter 11 settlement.

“But if the two companies do ultimately merge, that is going to be some tough customer,” the executive added. “I really don’t know what their game plan is, but can you imagine the power a combined Federated and Macy’s will have over vendors?”

Consultant Allan Ellinger, a partner in Marketing Management Group, said the move puts Federated in a strong negotiating position. And antitrust considerations might be a key issue — Federated would virtually own the New York area with Bloomingdale’s, Macy’s and A&S, he noted.

“Federated probably won’t end up controlling all of Macy’s, but instead it would get some of the divisions, like Bullocks, which Questrom built, and possibly some of the stores in the South,” added MMG partner, Andrew Jassin.

Ellinger and Jassin concurred that a merger would result in less competition, fewer buyers, less diversification in stores, matrixing and chains being run less independently.

“Overall, it’s not good for consumers or manufacturers,” said Ellinger.

He added that Macy’s has the expertise in private label, with a major presence in the Orient, and Federated has the technologically advanced infrastructure for running a business in the Nineties.

“Plus, Federated has a great deal of credibility, coming out of its own Chapter 11 as quickly as it did,” he added.

R. Fulton Macdonald, president of the consulting firm International Business Development, said the Federated move is a vote of confidence in the future of Macy’s, but: “It also gives Federated full insight into Macy’s strategies.

“Questrom is a careful, studious, meticulous merchant and manager…[His entry into the proceedings] also lets the bankers — who don’t know the department store business — off the hook in the reorganization. Federated knows about the retail business, and what it takes to come out of bankruptcy.

“I would prefer to see Mike Ullman and Roger Farah emerge as a strong team to lead Macy’s, because that would mean increased competition, and that’s healthy for everyone,” Macdonald added. “But the financial community has shown it has confidence in Questrom. Ullman and Farah better demonstrate very quickly leadership and vision.”

Isaac Lagnado, principal of Tactical Retail Solutions, referring to Questrom, said, “Underneath this charismatic, perhaps flamboyant leader, lies a methodical planner of tremendous discipline. A lot of people see the glitz and don’t realize that Allen is a relentless planner.”