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Federated Makes A Move On Macy’s

NEW YORK -- Federated Department Stores Inc. made a surprise move Sunday toward acquiring its archrival, R.H Macy & Co., Inc.<BR><BR>Federated has bought half of the secured claim of Macy's single largest creditor -- Prudential Insurance Co. of...

NEW YORK — Federated Department Stores Inc. made a surprise move Sunday toward acquiring its archrival, R.H Macy & Co., Inc.

Federated has bought half of the secured claim of Macy’s single largest creditor — Prudential Insurance Co. of America — making Federated a major player in Macy’s Chapter 11 reorganization.

The total purchase is valued at $449.3 million, with Federated paying $109.3 million in cash and the remainder due in three years. Federated has the option of acquiring the remaining 50 percent within three years.

Although at this point Federated is buying debt, upon a reorganization plan and Macy’s emergence from Chapter 11, it will likely turn into equity.

“Prudential owned approximately 15 percent of the total debt and 36 percent of the secured debt,” said a Federated spokesman. However, it is unclear how these percentages will translate in a reorganization plan.

This sneak attack gives Federated a foothold to acquire a major chunk of Macy’s down the road, and industry observers say it could block out other potential Macy takeover candidates such as Dillard’s and May Co.

Federated stated Sunday that it acquired half of the Prudential claim “with the ultimate objective of working toward a combination of Federated and Macy’s into a single nationwide multi-billion dollar department store operation, with the potential for greatly enhanced operating efficiencies.”

Allen Questrom, chairman and chief executive officer of Federated, said in a statement: “We are enthusiastic about the prospect of creating an exciting new department store company that can offer enhanced value and long-term growth potential to Federated’s shareholders, as well as to Macy’s creditors, to our customers and all of our combined stakeholders.”

“What we are trying to do is get a place at the table as a secured Macy’s creditor,” added a Federated spokeswoman. “We will have some say in the reorganization through the bankruptcy process, with which we are thoroughly familiar.” Federated emerged from a two-year Chapter 11 reorganization in February 1992.

Myron E. Ullman, chairman and chief executive officer of R.H. Macy & Co., said he first heard about Federated’s move Sunday afternoon.

“From our point of view, Macy’s has made good progress within our reorganization. It doesn’t surprise us to learn of the interest in the company. Macy’s is a great franchise.”

“They say it’s not hostile,” said Ullman. “It’s premature for us to judge. I don’t see it as a hostile move.”

Federated said it’s been in conversations with Prudential “since this fall,” according to the spokeswoman, adding: “Macy’s didn’t know about it.”

However, Robert Miller, counsel for Macy’s bondholders’ committee, said, “I think it’s a very curious and unusual move. I don’t know whether to interpret it as hostile or not. Federated did it without any indication to Macy’s or to its creditor groups.”

In October, Macy’s and Federated settled a three-month battle over Roger Farah. Farah, former chairman and chief executive officer of Federated Merchandising Services, was named Macy’s president and chief operating officer, effective July 1, 1994. Federated sought to thwart the Farah appointment, claiming he was bound by a Federated contract. The two firms settled when Macy’s agreed to pick up Farah’s $1 million Federated salary through June 30, 1994. The agreement also allowed Federated to file a $3.3 million claim against Macy’s for the SABRE computer system Macy’s is using.

A Federated spokeswoman said the Farah episode was “totally incidental” to the latest move.

Ullman said Macy’s has secured claims of more than $6 billion, and Federated’s will ultimately account for half a billion dollars.

“We recognize [Federated’s] desire, but it’s premature to comment on whether it’s appropriate for Macy’s. Our responsibility is to maximize the value created by restoring Macy’s to profitability.”

Macy’s entered Chapter 11 in January 1992. The company is negotiating with its creditors to determine the size of the assets and how they will be appropriated.

The Prudential-Macy’s loan bears interest at the rate of 12 percent. Taking into account the accrued interest on the loan since the filing, the actual amount of the Prudential claim against Macy’s was more than $1 billion.

The loan is collateralized by mortgages on 70 of Macy’s 110 department store properties.

Questrom said, “We hope this investment gives us a platform to explore with Macy’s management and other constituents possible alternatives that might provide the maximum value for Macy’s creditors, while at the same time enhancing long-term value for Federated’s shareholders and for our customers.”

Questrom added that while there can be no certainties in the Chapter 11 process, “we are satisfied that the claim we purchased will prove to be a sound investment for Federated.”

A Federated spokeswoman added, “We don’t anticipate there will be any unresolvable antitrust problems.”

Federated operates 219 department stores under the names of Bloomingdale’s, Abraham & Straus, The Bon Marche, Burdines, Goldsmith’s, Jordan Marsh, Lazarus, Rich’s and Stern’s. Federated’s volume is estimated at $7.2 billion. Macy’s, whose 110 stores operate under the names Macy’s, Bullock’s and I. Magnin, does approximately $6.3 billion in volume.

Macy’s and Federated have been at swords’ points for a long time. Back in 1988, Edward Finkelstein, former chairman of Macy’s, entered a bidding war with Robert Campeau to acquire Federated. Campeau won, but sold Federated’s Bullock’s and I. Magnin divisions to Macy’s for $1 billion.

The debt from the Bullocks-Magnin acquisition is said to be one of the causes of Macy’s Chapter 11 filing.

Since the acquisition, the West coast has been a continual problem for Macy’s. It has closed 11 Magnin units there, and currently operates 13.

Reports have long been circulating that Questrom, who formerly headed Bullock’s, would like to have Bullock’s back under Federated’s wing. Federated doesn’t have a California presence.

“The move is just not geography,” said Isaac Lagnado, principal in Tactical Retail Solutions. “Questrom has been moving toward centralized buying. Macy’s is a natural fit for them, with Macy’s emphasis on moderate price points and the home.”

“They say it’s not hostile. It’s premature for us to judge. I don’t see it as a hostile move.”
— Myron E. Ullman, R.H. Macy & Co.

By Lisa Lockwood and Jonathan Auerbach