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Zellers Could Be Next Target

Target Corp. may be considering the acquisition of Canadian retailer Zeller’s, A.G. Edwards & Sons analyst Robert Buchanan said in a report.

NEW YORK — Target Corp. may be considering the acquisition of Canadian retailer Zellers, said A.G. Edwards & Sons analyst Robert Buchanan in a report to investors.

Target’s bid for Zellers could come as early as next month, Buchanan’s Canadian sources indicated.

“Soon to be flush with cash from the pending sale of Marshall Field’s and likely sale of Mervyn’s, Target is in a strong financial position to buy Zellers,” said Buchanan. “With Hudson’s Bay’s enterprise value just $921 million, we believe such a deal would be accretive over time, even taking a premium valuation for Zellers.”

Canada’s Hudson’s Bay Co. currently owns Zellers, which last year recorded operating profits of $91 million on $3.5 billion in sales. The retailer operates 312 stores encompassing 29 million square feet. Its stores are located throughout Canada, with concentrations in Ontario, Quebec and the western region.

Zellers would likely be a good fit for Target for both expansion and merchandising purposes, Buchanan noted.

“Having until now opted not to enter Canada, Target will at some point approach saturation in the U.S. vis-à-vis the general merchandise realm,” said Buchanan. “Like Target in the U.S., Canada’s Zellers is positioned as an upscale alternative to Wal-Mart, which ended last fiscal year operating 231 stores in Canada.”

Target currently operates 1,248 stores, including approximately 125 Super Targets.

Zellers management was unavailable for comment on a possible deal, Buchanan said, while Target’s executives were reached but declined to comment.

Despite its $3.5 billion in annual sales, Zellers has struggled for years, giving Hudson’s Bay added incentive to sell.

Target, meanwhile, struck a $3.24 billion deal with May Department Stores Co. for 62 Marshall Field’s stores and nine Mervyn’s locations, meaning its coffers will soon be very liquid. Moreover, Buchanan believes Target will eventually sell its remaining Mervyn’s stores for upward of $2 billion.

Buchanan reiterated his “buy-conservative” recommendation on Target shares with a 12- to 18-month price objective of $63.

— Dan Burrows