PROFFITT’S, CARSON’S AGREE TO MERGER

Byline: Valerie Seckler

NEW YORK — Eyeing economies of scale and enhanced purchasing power, Proffitt’s Inc. and Carson Pirie Scott & Co. jointly said they have entered into a merger agreement Tuesday, valued at roughly $790 million.
“This transaction will create the fourth-largest department store company in the U.S., operating over 230 stores in 24 states, with annual revenue of $3.5 billion,” R. Brad Martin, chairman and chief executive officer of Proffitt’s, said in the joint statement Wednesday.
“We believe there are opportunities to improve the merchandising operations of the combined businesses through strengthened vendor relationships, the development of key brands and further private-brand development,” Martin stated.
“Additionally, Carson’s management information systems and credit operations will increase capacity in those areas for the entire organization and will provide an infrastructure to support further regional growth,” the ceo noted.
Under the plan, Carson’s will keep its headquarters in Milwaukee and function as a separate department store unit of Proffitt’s, a rapidly growing regional retailer with sales of $1.9 billion in its latest fiscal year ended Feb. 1.
The boards of both companies have approved the deal to combine Proffitt’s and Carson’s by giving Carson’s shareholders between 1.7 and 1.8 shares of Proffitt’s common stock for each share of Carson’s stock.
On Wednesday, Carson’s stock surged 20.3 percent, or 7 5/8, to end at a 52-week high of 45 1/8 on the New York Stock Exchange, while Proffitt’s shares added 1 3/8 to close at 28 1/8 on the Big Board.
Industry observers reiterated the need for Carson’s and other independent regionals to build up mass via acquisitions as the U.S. retail market continues to consolidate, or eventually become takeover targets themselves.
The planned merger with Carson’s would put Proffitt’s annual sales volume in fourth place among traditional department store companies — behind Federated Department Stores, with volume of $15.22 billion in 1996; May Department Stores Co., with volume of $11.6 billion and Dillard’s Inc., with volume of $6.2 billion.
Carson’s and Proffitt’s each have expressed interest in acquiring the bankrupt Elder-Beerman, as noted, but a provision in Elder-Beerman’s plan of reorganization would ban acquisition plays for the firm for one year after it emerges from Chapter 11.
Under the agreement announced Wednesday, Proffitt’s plans to issue about 29.7 million shares, which it expects to complete early next year, following the approval of federal regulatory agencies and shareholders in both companies. The $790 million purchase price is based on the 27 1/8 closing price of Proffitt’s shares last Friday.
The $790 million deal represents 72 percent of Carson’s $1.1 billion in annual revenue, an aggressive sales multiple that analysts said they would expect a well-run regional chain like Carson’s to command.
“Carson’s has a good franchise,” said Philip Abbenhaus, retailing consultant at KPMG Peat Marwick in St. Louis. “By coming under the umbrella of Proffitt’s, a growing, first-class operation, they have to be making their shareholders happy.
“It’s ironic that Carson’s and Younkers will become sister companies,” Abbenhaus added, referring to the unsuccessful, year-long proxy battle waged by Carson’s to acquire Younkers, begun back in the fall of 1994.
Stanton J. Bluestone, Carson’s chairman and ceo, will continue to hold those posts after the merger is consummated.
“The contiguous geographical relationship of our stores, with only limited market overlap, makes this combination a great fit,” Martin said. “The addition of Carson’s substantially strengthens our presence throughout the Midwest, particularly in the greater Chicago area, Milwaukee and central Illinois.”
Carson’s generates about 60 percent, or $720 million, of its $1.2 billion in annual sales in the Chicago market, where 28 of its 53 stores are located, analysts noted. Carson’s also has 12 stores in Wisconsin, most of them in the Milwaukee area, and 13 units in central Illinois Proffitt’s stores are concentrated in the upper Midwest and the Southeast.
The acquisition of Carson’s would extend Proffitt’s four-year acquisition binge, which began back in March 1994, with its purchase of the 28-unit McRae’s department store chain.
Proffitt’s, based in Alcoa, Tenn., picked up the Parks-Belk Co., a four-store chain in Tennessee, in April 1995; merged with 51-unit Younkers in February 1996; purchased 38 specialty stores from Parisian Inc. last October, and merged with Herberger’s 39 department stores this past February.
“In acquiring regional department store chains, Brad Martin is building a huge mass, similar to what Federated, May and [the former] Allied Stores represented years ago,” said Gilbert Harrison, chairman of Financo Inc., the New York investment banker. “He’s running a bunch of regional chains as individual operations, tied together with integrated back-room operations.”
“The real key is for Proffitt’s to continue to consolidate its back room so it can benefit from economies like Federated has done with its acquisitions of Macy’s and Broadway Stores,” said Robert E. Kerson, chairman, Levy, Kerson & Assoc., executive search consultants.
Proffitt’s estimated it would realize cost savings of about $10 million next year, $20 million in 1999 and $40 million in 2000 through the elimination of duplicate costs and the increase in its purchasing power.
Martin projected that total debt-to-capitalization ratio will fall to 27 percent by the end of 1998, from 40 percent this year.
Based on the anticipated cost savings next year, Proffitt’s estimated fully diluted earnings per share would hit $1.77 in 1998. For the fiscal year ended Feb. 1, Proffitt’s earned $37.4 million, or $1.41 a share, on sales of $1.9 billion.

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