By and  on April 4, 2005

NEW YORK — J.C. Penney Co. has strong defenses in place that would make a leveraged buyout by financial investors difficult, largely because getting the consent of its board would be difficult — or, at the very least, time-consuming. However, a hostile takeover of Penney’s could take place, but it would carry a high purchase price.

Meanwhile, Wall Street and the investment community continued to digest news of a possible acquisition of Penney’s by private equity firms Cerberus Capital Management LP and the Carlyle Group. In Friday stock market action, shares of Penney’s gave back slightly less than half what they gained the day before.

According to Penney’s bylaws, the company has a tight defense against hostile takeovers, including a shareholder rights plan — otherwise known as a “poison pill” — that was first put in place in 1986 and replaced in 2002. Poison pill strategies are used by most public companies as a way to dissuade hostile takeovers; they make the company’s stock less attractive to the potential acquirer.

One New York-based hedge fund manager who owns shares of Penney’s stressed, however, that the company’s poison pill procedures could likely never be triggered because the details of its voting and board of directors procedures could be protection enough. Penney’s executives are “protecting themselves more than other companies,” he said.

Penney’s has a classified board of directors with staggered terms, according to the bylaws. This means that, unlike some companies, a brand new board is not voted in each year at its annual meeting. Rather, it takes a couple of years for even a portion of Penney’s directors to be replaced. This would make it hard for the private equity firms to nominate their own board.

Penney’s existing board is also authorized to increase or decrease the size of the board without first getting shareholder approval. Penney’s corporate Web site listed 10 people on its board of directors.

According to the voting procedures in Penney’s bylaws, shareholders also cannot call special meetings, which means that if Cerberus and Carlyle were majority stakeholders in Penney’s — which they are not, according to filings with the Securities and Exchange Commission — they couldn’t call a shareholder meeting to vote on a buyout. In order to amend the rules regarding special meetings, a “supermajority,” or 80 percent shareholder approval, is needed.However, if Cerberus and Carlyle were to make a play for Penney’s, now could be an opportune time because the retailer’s annual shareholder meeting usually takes place in May.

A hostile takeover by Cerberus and Carlyle Group could be possible if the two firms “put a very high bid on the table,” which could conceivably make Penney’s shareholders revolt and remove the existing board of directors, the hedge fund manager said. He added, however, that “usually financial buyers don’t go hostile.”

A.G. Edwards & Sons analyst Robert Buchanan downgraded shares of Penney’s on Friday to “hold” from “buy,” saying the risk-reward ratio of Penney’s stock is now balanced. For his part, Buchanan called the chance of change in control at the company “remote.”

“We put low odds as to the chances of a Cerberus-led group, or any other for that matter, purchasing J.C. Penney, being of the strong belief that chief executive officer Mike [Myron] Ullman [3rd] and team are doing an outstanding job running the business,” Buchanan wrote in a research report.

The analyst conceded, however, that “to the extent a given group were to be willing to overpay, Penney’s strong board would have a decision to make.”

Walter Loeb, a consultant at Loeb Associates, said, “I believe J.C. Penney is in a growth mode, and do not believe that it is for sale.”

Cerberus and the Carlyle Group were first said on Wednesday to have partnered in order to buy Penney’s for $16 billion to $18 billion. Penney’s ceo and chairman Ullman said in a statement Thursday that the company will discuss “a long-range plan” with investors at its analyst meeting April 19 and 20. He did not comment directly on reports about a potential acquisition.

Shares of Penney’s closed Friday trading on the New York Stock Exchange down 3.6 percent at $50.04, after rising 8.4 percent in Thursday’s session.

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