By  on February 16, 1994

NEW YORK -- Now it's Federated's turn to give Macy's the cold shoulder.

Federated Department Stores has rejected a request by R.H. Macy & Co. to be included in its meetings with Macy's creditors, it was learned.

Meanwhile, reports that General Electric Capital Corp. might be Macy's white knight continued to gain strength Tuesday.

Federated met with Macy's secured creditors Tuesday and is to meet with unsecured creditors at 10 a.m. today in the offices of Jones, Day, Reavis & Pogue, its attorneys.

Federated's goal is to convince Macy's creditors that a merger between the two retailers would be beneficial to all.

"Macy's has an obvious stake in hearing what Federated is discussing, particularly in regard to Federated's financial condition

and its perceptions of the synergies of a merger," said a source close to the situation who asked not to be identified.

The source said Macy's executives were somewhat surprised and disappointed that they weren't going to participate, in light of Federated's past statements that it wants to work with Macy's -- and doesn't want a hostile takeover.

Macy's has been cool to the idea of a Federated merger.

Federated gained a seat at Macy's negotiating table when it acquired half of Prudential Insurance Co.'s $1 billion secured claim against the organization, with an option to buy the other half. Meanwhile, as all indications of a friendly merger slowly evaporate, reports continued this week that GECC could soon emerge as Macy's savior to help fend off Federated's advances.

Reports surfaced last week that Thomas Shull, Macy's executive vice president and point man on plan negotiations, had been meeting with GECC for most of the week.

GECC is a major player on several fronts in Macy's reorganization. Gary C. Wendt, GECC's chairman, president and chief executive officer is a Macy director. In addition, GECC is Macy's single largest preferred shareholder and purchased Macy's in-house credit card operations in 1991.

The source said new loans from GECC could give Macy's the $1 billion owed to Prudential and Federated.

"They could say to Federated, 'We're going to give you cash, so you're out of the negotiation process,"' the source added.The Prudential loans are backed by mortgages on 70 of Macy's 110 department stores. Once Federated is paid off, the collateral could then go to GECC, the source said.

GECC could not be reached for comment Tuesday. Macy's declined comment on both the GECC reports and Federated meetings. Federated also declined to talk about the meetings.

As for today's meeting, industry sources say Federated has already worked out some strategies for merging various divisions and dealing with competitive situations should it acquire Macy's. These include:

  • Converting some Abraham & Straus units into Macy's stores, or, in the case of the A&S store on West 33rd Street, one block away from Macy's Manhattan flagship, changing it to a Stern's.

  • In the South, when Rich's and Macy's are in the same malls, to keep the strongest one open and shut the other.

  • Transforming I. Magnin stores into Bloomingdale's, which would give Bloomingdale's its long-desired presence on the West Coast.
Creditors planning to be present at the gathering today said Tuesday that they expect a presentation long on hyperbole but short on detail. "I'm not going with high expectations, " said one source. "I suspect they'll just try to get us comfortable. I'd be surprised if they got into any details about the merger other than their own business plan."

Added another invitee: "I don't know the answer, but I think Federated is going to outline their internal business plan and their preliminary thoughts as to why a merger makes sense as an operating process. I don't think they're going to tell us the terms of a plan of reorganization.

"I don't think they want to be too definitive because Macy's still is operating under exclusivity," he added. "In our previous meetings, Federated never said, 'Here are our thoughts,' but rather, 'What do you want to know? "'

The source, who said he favors a merger, added: "Federated projects margins of 11 to 13 percent over the next five years, while Macy's projects up to 9 percent, according to the business plan.

"One would assume by acquiring Macy's, Federated can earn the same margins, if not more."The incremental sales gain from a merger will likely result in higher cash flow, so Federated can say: 'We can afford to buy this business because we're a more efficient operator and by combining the two businesses, we can eliminate many duplicative functions and produce higher earnings."'

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