The Darling Bid of May: Wins Marshall Field’s With $3.2 Billion Offer

NEW YORK — May Department Stores won the two-horse race for Marshall Field’s — and paid big for the coveted nameplate.<br><br>The St....

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NEW YORK — May Department Stores won the two-horse race for Marshall Field’s — and paid big for the coveted nameplate.

The St. Louis-based retailer beat out Federated Department Stores by paying Target Corp. $3.24 billion in cash for the 62-store Field’s chain, plus nine Mervyn’s stores in the Twin Cities area of Minneapolis and St. Paul, three distribution centers and $600 million in credit card receivables. A definitive agreement was announced late Wednesday afternoon after the stock market closed.

This story first appeared in the June 10, 2004 issue of WWD.  Subscribe Today.

Management at Target said it was buying back $3 billion of its common stock and that the program, which replaces its existing one, will take about three years to complete. Regarding Mervyn’s, Target said the review of strategic alternatives is “continuing in line with its expected timetable, and additional information regarding this review is expected to be available within 60 to 90 days.”

The Field’s buy is the kind of bold move May Co. needed to recapture its momentum, but it comes at a steep price, almost $700 million above the $2.58 billion in volume Field’s recorded in 2003. Field’s had pre-tax profits of $107 million last year.

Gene Kahn, chairman and chief executive of May Co., defended the cost of the deal, stating, “We did a lot of due diligence. It is an aggressive price, but this will reward May. We paid the right price. This is really a strategic combination that will add significant value for May shareholders. This truly makes us a more complete company. It gives us better scale and a tremendous laboratory for learning about better and more upscale merchandise. We are moving the total corporation in that direction.”

May has a conference call with analysts today, Kahn noted. “We have a great story to tell. This is an important acquisition that the Street will view favorably.”

Marshall Field’s takes May into better-priced markets, including designer, an area where it has had only limited exposure in the past. Field’s towering State Street flagship in Chicago remains one of the world’s premier department stores. Target invigorated the store last year with floor renovations, leased shops with limited distribution, unconventional adjacencies and an eclectic assortment with everything from Australian homemade ice cream to Thomas Pink shirts from England, across the 812,000 square feet of selling space. The State Street flagship is the second-largest store in America next to Macy’s Herald Square.

May chased Field’s in the early Nineties, when the former Batus Retail put it up for sale, but lost out to Target.

From a creditor’s standpoint, May’s balance sheet easily supports the acquisition. The retailer has about $3 billion in inventory to write against, if need be, and $438 million in cash and cash equivalents as of May 1, the end of its first quarter.

May has worked to reduce its debt load over the last few years. By the end of the first quarter, total long-term debt stood at $3.79 billion, down from $3.94 billion in the same period last year. Subsequently, the retailer’s long-term debt to sales ratio for the quarter dropped to 1.28 from 1.37 in the prior year.

May, the operator of such regional nameplates as Lord & Taylor, Filene’s, Hecht’s and Famous Barr, needs a volume lift since it has not shown the kind of gains most retailers have shown this year or last and has not made a major acquisition since the Eighties, though it’s been buying up bridal and formal wear chains and isolated department store units shed by other retailers. The Field’s deal brings May up to $15.94 billion in volume, compared with $15.26 billion at Federated last year, and is a clean fit. Field’s dominates the Detroit, Minneapolis and Chicago markets, where there is very little overlap with May stores.

However, with May capturing the coveted Field’s, among the most venerable retail nameplates in the country, Federated could step up efforts to see what other possible acquisitions are out there. “There was a meeting two months ago between Federated and Dillard’s and I believe Federated at that point was trying to figure out if it had a fall back, if it didn’t get Marshall Field’s,” one financial source said. “Dillard’s is much bigger, it has big stores and all the locations are excellent, but granted, many of them need capital.”

The source said to watch Dillard’s stock, which could get a pop following the Field’s announcement. “Speculation will increase about Dillard’s, and you have to wonder if Bill Dillard [2nd, chairman and chief executive officer] won’t think twice about selling. He’s got a five handicap [in golf], a wife who is much younger, and he likes to travel.”

However, the Dillard family has a majority of stock and has reportedly been reluctant for years to sell despite overtures from various retailers.

In the end, obviously, May was the hungriest. The same financial source said that in the past two weeks, “Gene was spending all of his time working on this.” In addition, Dean Wolfe, head of May real estate, was said to be instrumental in the acquisition process, the source said.

“It’s a big price and a very preemptive bid but I believe that both Federated and May were the perfect suitors,” said Gil Harrison, chairman of Financo. “Word is it was a battle to the end. Paying over 1.2 times sales is high, but May certainly has the synergies to make the deal worth the price.”

According to Kahn, “Marshall Field’s has a lot of wind in its sails right now. We want to enhance the platform they operate on.” That includes bringing more of the cachet and merchandising of the recently renovated and re-merchandised State Street flagship in Chicago to “the top 15 doors.”

“We are in a transition strategy now, but our intention is to do a lot more learning. There’s a strategy in place that is really dynamic,” which, he said, targets a 40- to 60-year-old female consumer with a high annual income level.

Kahn said Field’s will continue to be run as a separate division still based in Minneapolis, with the Field’s team intact and with Linda Ahlers continuing as president.”This will be May’s seventh division and similar to Lord & Taylor will be autonomous and not classified as one of our moderate to upper moderate divisions. Marshall Field’s carries moderate to designer merchandise, has its own persona, which will be perpetuated. There are obviously efficiencies we can harness and things that we can to do to help Field’s,” such as providing May’s private brands.

For the time being, Field’s proprietary brands will continue to be sourced by AMC, owned by Target Corp., but that could change later.

Field’s stores range widely in size and performance. Asked if some doors might be shuttered, Kahn said, “We don’t foresee that in the future right now. We think this is a very complete company. We have a tremendous opportunity to cross-fertilize ideas and vendors.”

Asked if Field’s could expand to new regions, Kahn replied, “We have no plans to do that.”

There has been speculation that May was determined to buy Field’s in order to catch up to Federated in terms of size and better merchandise. However, Kahn disputed that, saying, “I think it had little to no bearing. We see this as a strategic acquisition. Marshall Field’s complements May and is a terrific asset.”

Other observers disagreed, however. “I wouldn’t be surprised if May reexamined some [of] Field’s stores in small towns in Michigan. In Battle Creek, there’s a store under 100,000 square feet and there’s another small store in Kalamazoo,” said Ed Nakfor, a retail consultant in Birmingham, Mich. “I don’t know how attractive those sites are. They could be offered to Kohl’s or Younkers, and maybe some sites could become Lord & Taylor units. May wanted to open a Lord & Taylor in Grand Rapids, but got shut out of the market by Hudson’s,” which later became Marshall Field’s. “There are two Marshall Field’s there now and one could become a Lord & Taylor.”

Nakfor also said “Field’s has to figure out who they want to be. One day they advertise 13-hour sales, or a bargain day, at the same time you might see a beautiful four-color sophisticated ad. Field’s has lost its way.”

Bob Buchanan, retailing industry group leader at A.G. Edwards, expressed the issue differently. “Field’s has never been able to execute the niche between mainstream department stores and Neiman Marcus,” unlike Bloomingdale’s or Nordstrom. “But I think May could successfully run it that way.”

Buchanan and other sources observed that the parent Target Corp. has put more of its resources into the Target division. They also noted that they believe Target has cut a lot of costs at Field’s, making it challenging for May to cut more, though synergies are seen, such as with sourcing.

May Department Stores at a Glance

2003 Total Revenue: $13.34 billion

2003 Net Income: $434 million

Department Stores: Before acquisition, 438 units under these nameplates: Famous-Barr, Filene’s, Foley’s, Hecht’s, Kaufmann’s, L.S. Ayres, Lord & Taylor, Meier & Frank, Robinsons-May, Strawbridge’s and The Jones Store.

Specialty Stores: After Hours Formalwear, 457 locations; David’s Bridal, 215 stores, and Priscilla of Boston, 10 units.

Source: Company Reports

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