By and  on February 23, 2005

NEW YORK — The Federated-May merger talks are at full boil and a deal could happen as early as next week.

As the two department stores battle over the final price, sources said Tuesday that Federated could be arranging a sell-off of its, or May’s, credit operation, May divisions and individual stores to others, such as J.C. Penney and, to a lesser degree, Nordstrom and Saks Inc. That would raise money to finance the merger, help avoid government antitrust concerns, and reduce store overlaps. Sources see most of this occurring in the Northeast and West, with Federated most anxious to retain May properties in the Midwest and Texas, notably Marshall Field’s and Foley’s.

One financial source noted that if an announcement doesn’t occur by early next week, it’s an indicator that the parties can’t agree on price, given that negotiations have been going on for several weeks.

The only apparent question now is the final cost to Federated — whether it will be $11 billion or $13 billion, or somewhere in between.

Stacy Turnof, analyst at Merrill Lynch, observed in a research note, “Our analysis indicates that the deal could be worth between $36 and $43 per share. We believe that price is the key issue rather than the Federal Trade Commission at this point, and that there is a strong likelihood that the deal could transpire over the next several days.”

On Tuesday, May’s stock closed at 33.62, up 17 cents, and saw heavy trading on the New York Stock Exchange.

Federated’s stock closed at 55.29, down $1.43. The decline came despite the retailer releasing fourth quarter and 2004 results that were impressive in light of a challenging and late Christmas season and consolidation efforts involving Macy’s and Federated’s home business.

The fourth-quarter results beat Wall Street’s estimates by one cent, with the upside surprise partially boosted by a small decline in the expense ratio.

For the three months ended Jan. 29, income declined by 4.3 percent to $440 million, or $2.55 a diluted share, from $460 million, or $2.50, a year ago. Earnings per share were at the upper end of the company’s guidance, which had ranged from $2.45 to $2.55, and one penny above consensus of $2.54. The gain in earnings per share, despite a decline in income, reflects a 6.3 percent reduction in shares outstanding. Sales inched up by 0.4 percent to $5.07 billion from $5.05 billion, while same-store sales gained 0.8 percent.

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