MAY CO. AIMS TO SPIN OFF PAYLESS SHOES
Byline: Sidney Rutberg and Valerie Seckler
NEW YORK — May Department Stores Co. plans to spin off its $2.3 billion Payless Shoe Source chain, raising the possibility of future acquisitions to strengthen its department stores.
Wednesday’s announcement stirred rumors that May had its eye on the 13 Strawbridge & Clothier department stores, though sources close to the negotiations said Federated Department Stores was also a player for some Strawbridge units.
May Co. and Federated declined to comment, and Strawbridge officials couldn’t be reached.
Strawbridge said in October that it retained Peter J. Solomon Co. as a financial adviser to explore strategic alternatives for the firm, including a sale, merger or acquisition.
Strawbridge also operates 27 Clover discount stores. Target is said to be eyeing many of those sites. Target officials were not available for comment.
May has been aggressive on the acquisition front, purchasing Woodward & Lothrop — including its John Wanamaker division — last August. It’s also said to have held talks with Mercantile Stores and Dayton Hudson. Mercantile last year acknowledged it was in merger talks, but never identified the other party and subsequently said the talks went nowhere. Dayton Hudson officials have repeatedly said their DH department stores are not for sale.
Walter Loeb of Loeb & Associates said, “I wouldn’t be surprised if May winds up with all or part of [Strawbridge].”
Arnold Aronson, principal of Levy, Kerson, Aronson & Assoc., said, “The question is how many Strawbridge locations could May or Federated use? May now has a couple of Wanamaker’s located in centers with Strawbridge & Clothier stores. Maybe they could divvy up the sites with Federated.”
“The spinoff enhances May Co.’s already strong financial position,” said Harry Ikenson, senior director and research analyst at Rodman & Renshaw Inc.
The spinoff to May shareholders will result in a special pretax charge of about $70 million in May’s fourth quarter. The company said the charge will reflect costs of closing or relocating about 450 stores and other costs of the spinoff.
In a statement, David C. Farrell, chairman and chief executive officer of May, said Payless will be the leading competitor in its segment of the market and “will be well positioned for future growth with a strengthened management team and streamlined operating structure.
He added that “May’s strong financial position will be enhanced, increasing its flexibility for future acquisitions or stock repurchases.” May stock rose 5/8 to 43 1/4 Wednesday on the New York Stock Exchange.
“For May, it produces a pure department store play, the most profitable department store chain in the business,” said Todd Slater, retail analyst at UBS Securities. “It also removes the drag on earnings by Payless, which has been underperforming. It will free up capital that May would have needed to grow Payless. After the spinoff, this can be used for department store acquisitions or stock buybacks.”
By closing some of its stores, Payless should improve its performance, Slater added. Payless, with 4,557 self-service family shoe stores, will be the largest independent shoe retailer in the country, May said, adding that it sells one out of every five pairs of shoes sold in the U.S. and will have a strong cash flow.
Shares in the shoe operation will be distributed to May shareholders on a tax-free basis. The transaction is expected to be completed late this spring.
Payless will have more than $1 billion in assets, about 25,000 employees, and will be headed by Steven J. Douglass, chairman and chief executive officer of Payless.
In 1994, Payless accounted for $132 million, or about 17 percent of May’s $782 million in net profits. For the first nine months of 1995, Payless earned $86 million, or 22 percent of the $390 million in May profits.
May Co. operates 346 stores in 30 states and the District of Columbia and has 95,000 employees. — Fairchild News Service