By and  on June 14, 1994

NEW YORK -- R.H. Macy & Co. said Monday that despite recent -- and possibly ongoing -- high-level talks with Federated Department Stores, its strategy for emerging from bankruptcy as an independent company hasn't changed.

But in an apparent shift, Macy's appears to have left the door open -- if only slightly -- for a possible merger.

Macy's officials plan to meet with Federated again this week, and some sources take that as a sign that Macy's position could be softening.

"They weren't talking before. Now they are," said one Macy's source. "There is no way talks can get to this level without something happening." Contrary to the store's official position, the source even indicated the possibility of a merger with Federated.

Bondholders, who could hold a key

to a consensual plan, continue to support Macy's stand-alone plan. "Look, the bondholders have already gone on record as backing the Macy's proposal and, pending a higher offer from Federated, they will continue to support Macy's through the plan approval process," a bondholder source said.

But a better offer is not expected soon, the source added, noting the group has held talks with Federated, but the retailer hasn't budged from its original proposal.

Federated, which reportedly has won over the support of secured creditors, appears confident that the Macy's plan will be voted down by creditors, the source said.

"Right now there is only one plan on the table, Macy's plan, and they propose to pay secured creditors 100 cents on the dollar and have the support of the bondholders' committee and their $1.3 billion claim," the source said.

Separately, the office of the New York State attorney general, which enforces state antitrust laws, said Monday it has opened an investigation into Federated's move on Macy's. Meanwhile, the Federal Trade Commission is continuing its own investigation into the possible antitrust implications of a Federated/Macy's merger, as reported.

A source close to New York State Attorney General G. Oliver Koppell said no subpoenas for records have been issued yet.

Macy's, looking for any advantage in its bare-fisted battle with Federated, said it plans to cooperate with the Koppell's office and was asked to provide "detailed information and documents" relating to Macy's business, the competition with Federated and other chains.If the attorney general totally or partially blocks Federated's move on Macy's, it wouldn't be the first time the antitrust cop blew the whistle on marketplace monopolies.

In March 1988, when Macy's wanted to take over Federated, then New York State Attorney General Robert Abrams forged an agreement where Macy's would divest 11 of Federated's Abraham & Straus units, representing $500 million in sales, within two years of closing the deal.

For the moment, however, Allen I. Questrom, Federated's fiercely competitive chairman and chief executive, has his hands tied, since Macy's has the exclusive right to file a plan of reorganization in bankruptcy court. Federated must wait until Aug. 1 at the earliest to file a plan, when Macy's exclusivity rights end.

Bankruptcy Judge Burton R. Lifland "had the opportunity several weeks ago to put two plans on the table but instead opted to request only a Macy's plan of reorganization," according to an attorney involved in the Chapter 11 case. "That meant that Federated was pushed aside not to the on-deck circle, but to the dugout. There is only one plan to be considered and that's Macy's plan."

The battle between Macy's and Federated could boil down to a battle of financial experts, with Macy's advisers arguing in favor of Macy's future equity and Federated's advisers pushing Federated's existing market value over the uncertain value of Macy's equity.

"Judge Lifland is not a financial expert, so he will have to listen to how the two sides' financial pros value their equity payout to secured creditors," said a veteran bankruptcy attorney who has argued many cases before Judge Lifland.

If Judge Lifland determines there is no discernible difference between the two plans, he will consider which plan preserves the most jobs, the attorney said.

While it is not yet clear how many jobs might be lost in a merger, Federated is expected to quickly consolidate certain operations, with an expected savings of at least $100 million annually.

For its part, Macy's, since filing Chapter 11, has continued to aggressively streamline its staff and has steadily narrowed its losses. Some have argued, however, that the cuts have gone deep and store service and housekeeping have suffered.In the meantime, Federated continues to talk up the virtues of a merger with creditors and Macy's, through the mediation process, and may even back a court action by senior creditors to shorten Macy's exclusivity period. Some sources believe Federated could come up with a sweetened plan to make the court and creditors take another look.

"There is no way Allen is going to back off," said a source, who added that retailing continues to be difficult -- for both Federated and Macy's, and executives are searching for solutions to cut costs.

But according to Macy's officials, merging Macy's with Federated isn't one of them. "Nothing has changed," said a store official. "Macy's simply agreed to listen to what they have to say because we feel it is our fiduciary duty to do so."

Macy's, the official stressed, still intends to file its plan of reorganization on June 30, as previously announced.

Other Macy officials characterized a meeting Friday in New York with Federated as a mere "listening session" covering Federated's merger plans for Macy's, not its plan of reorganization.

Those attending the meetings included Ronald Tysoe, Federated's vice chairman and chief financial officer; Myron Ullman, Macy's chairman and chief executive officer, and two other Macy executives, Thomas Shull, executive vice president, and James Kenney, group vice president for corporate planning. Ullman, Shull and Kenney have been leading the reorganization efforts.

For months, there has been speculation that if Questrom didn't get Macy's, he'd pursue another chain. Speculation has focused on Neiman Marcus, where he was chairman and chief executive officer, or Carter Hawley Hale Stores, based in Los Angeles.

Federated currently does not have stores on the West Coast, but is planning to expand its Bloomingdale's operation there. Federated is also said to be interested in the Bullock's chain, which is operated by Macy's. Before joining Neiman's, Questrom was chief executive officer of Bullock's.

Questrom reportedly has the support of Laurence Tisch, a Macy's board member, whose position in the Federated-Macy battle and differences with Macy's management have been frequently publicized by the New York Times.

On Monday, the Times described Tisch as Macy's "most active board member" and instrumental in prodding Federated to meet with Macy's. Others noted that Tisch regards Federated's management as more capable than Macy's.However, a Macy's source noted, "Tisch really has nothing to do with this whole process. He can't vote on a plan of reorganization because of a potential conflict of interest." In addition to being a board member, Tisch is both a preferred shareholder and a bondholder.

The source added, "[Tisch] works through other people. I don't think he is calling the shots, but he does work behind the scenes. He has enormous influence, more than Ullman. He'll work out the best deal for himself. Remember, Tisch is not a retailer."

Tisch failed in his efforts to stop Macy's from purchasing Bullock's and Magnin's in 1988, an acquisition which helped drive Macy's into bankruptcy. Yet he did convince the board to remove Edward Finkelstein, Macy's former chairman and ceo in April 1992, after Macy's went bankrupt in January 1992. "Tisch is resolved to get what he wants. He is a very, very strong personality," said one ex-Macy's executive.

In the FTC probe into a possible Federated/Macy's merger, launched last month, the agency is apparently taking a more narrow approach than in previous retail investigations. It is believed that the regulatory agency is taking a closer look at market share issues, focusing on the effects the merger would have on department stores. Past investigations have focused on overall retail market share, and have largely rubber-stamped retail mergers.

Reportedly, the FTC is concerned about whether a Federated/Macy merger would make department store vendors overly dependent on Federated; how much Federated would affect prices, and its bargaining position with real estate developers.

According to Isaac Lagnado, principal of Tactical Retail Solutions, which does market share research, the government would focus on Macy's combining with A&S in the Northeast and a Macy's-Rich's combination and how that would affect key categories of merchandising, particularly women's sportswear and soft home furnishings.

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