By and  on July 9, 2007

NEW YORK — Shares of Macy's Inc. and Target Corp. each gained more than 5 percent in trading Friday on the New York Stock Exchange, the former on a recurring buyout rumor and the latter on possible action from an activist hedge fund.

Macy's closed the day up 5.3 percent, at $41.86, on rumblings that billionaire investor Edward Lampert, the chairman of ESL Investments that bailed Kmart Holding Corp. out of bankruptcy and then later engineered the merger of Kmart and Sears, Roebuck & Co., might have intentions to acquire the department store giant. The speculation in the market was specific enough to include today as a deadline for bids, although Macy's has never said it is for sale. The three-month average trading volume of Macy's shares is 6.8 million, but that jumped Friday to nearly 13 million.

"If you're looking at why would Sears Holdings buy Macy's, a number of boxes would check off," said Bear Stearns analyst Christine Augustine, who noted that Lampert likes businesses that have strong cash, brand franchise and real estate assets, all of which Macy's has. She added that Macy's would give Sears another platform on which to sell apparel on top of Sears' namesake and Kmart stores.

Shares of Macy's spiked last month on buyout talks, then retreated. At the time, traders said talks of a buyout by Kohlberg Kravis Roberts, Providence Capital and Goldman Sachs at $52 a share fueled speculation that helped bolster Macy's stock price. But several banking sources at the time didn't give the buyout talks much credence.

"I don't think it'll happen. The merger certainly hasn't gone as well as expected. Macy's is doing some things regionally that it had hoped to centralize. They are behind schedule and certainly are upset at themselves, but I don't think they would sell," said Walter Loeb, former Wall Street retail analyst and now a consultant with the firm that bears his name, on Friday.

The purchase of Harrah's Entertainment by TPG and Apollo Management, which still has to close, is another indication that buyout firms are targeting companies that are not openly on the auction block, said Loeb. He said with so much money in the market waiting to be invested, nearly every company was an acquisition target.Augustine, in a research note last month, wrote that a leveraged buyout in the low $50s for Macy's was "feasible." Macy's owns 68 percent of its real estate — 54 percent fully, building and land; 14 percent of the owned stores are on leased property, the analyst wrote.

As for Target, its shares rose 5.9 percent Friday, to $68.01, with 27.9 million shares traded, compared with a three-month average of 8.3 million.

Market speculation was that activist hedge firm Pershing Square might file a Form 13D with the Securities and Exchange Commission to force Target to sell its credit-card business. Pershing, run by Bill Ackman, typically takes long positions in companies and then tries to push management to take action to provide value to shareholders. According to Augustine, the sale of Target's credit-card business would result in a recapitalization of its balance sheet.

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