Byline: Valerie Seckler

NEW YORK — May Co. chairman and chief executive officer David Farrell, despite unsuccessful attempts to reportedly acquire Mercantile and Dayton Hudson’s department store division, is determined to make May number one again.
Sources close to the ceo said Farrell badly wants May Co. — with sales of $11.9 billion — to reclaim its ranking as the nation’s largest department store retailer. May Co.’s department stores alone have sales of $9.8 billion. Its Payless ShoeSource division adds another $2.1 billion.
With Mercantile and the DH division apparently out of the picture for now, analysts are speculating that May Co. could pursue units from The Broadway and Macy’s, if stores are put on the block. Woodward & Lothrop could be another target. W&L said this week it is seeking to sell four units and is looking for investors.
Analysts also suggested DH might consider selling a few units to May, including some in Texas.
May Co. was eclipsed in size by Federated Department Stores last December, when Federated purchased Macy’s, lifting its sales to about $14 billion. J.C. Penney’s department stores did $14.1 billion last year.
“Farrell absolutely wants to be number one,” said a source who has known the executive for many years. “When Federated edged out May Co., May stepped up its growth efforts.”
A determined Farrell continued to pursue Dayton Hudson’s department store division this week sources said, noting that it’s been an on-again, of-again dialog between the two retailers.
Stephen Watson, chairman and ceo of Dayton’s department stores, stated, “The rumors are false and the department store division remains an important part of the Dayton Hudson Corporation. Clearly, these rumors are being encouraged by parties who have a vested interest.” He added that Dayton Hudson is “committed to all three operating divisions [department stores, Target and Mervyn’s] and there is absolutely no truth to the rumor that the department store division is for sale.”
Officials at May Co. declined to comment.
Meanwhile, the speculation seems to have affected the stock. Dayton Hudson stock closed at 71 Wednesday on the New York Stock Exchange, up 1 7/8. On Thursday the stock closed at 70 1/8, down 7/8. The stock has ranged from 86 7/8 to 66 1/4 in the last 52 weeks.
“Farrell wants to move fast to make May bigger than Federated,” said Peter Schaeffer, analyst at Dillon Read. “If Farrell got Dayton Hudson’s department stores it would also give him the top chains in three cities — Chicago, Minneapolis and Detroit.”
Robert Buchanan, analyst at NatWest Securities has a similar view. “May Co. is very, very desirous of regaining the number-one post. Dave Farrell’s ego is playing a role,” he said.
“Sales of $11.9 billion are more than enough for May to operate effectively,” Buchanan continued. “But Federated’s doing around $13 billion, so the purchase of a $3.2 billion business from Dayton Hudson would make Farrell happy and enable May to further leverage costs and increase buying clout.”
According to analyst Walter Loeb, Dayton’s is “ready to sell its [four-store] Marshall Field’s division in Texas, but it isn’t ready to sell the rest of its department stores.”
“I think it will take more time for Dayton Hudson to realize May is the only buyer for the stores,” Loeb added. “I think it’s May’s turf, but Dayton Hudson has to be ready to go with it.”
A total May Co. takeover of DH would be a good fit. DH’s stores are 200,000 to 300,000 square feet, comparable to those of May Co. Also, an acquisition would give May Co. an entry into non-overlapping markets in the North Central region of the U.S. The key to May Co.’s long-term growth is for the St. Louis-based retailer to “further drive down its expense-to-sales ratio,” said Buchanan. “They’ve already consolidated about 17 divisions to eight or nine, so the only path left is acquisition.”
Bear Stearns analyst Steven Kernkraut looks for May Co. “to acquire additional department stores to increase in-market dominance as well as to compete effectively with Federated, Dillard Department Stores and J.C. Penney.”
Ladenburg, Thalmann analyst Barry Bryant said May Co.’s options are narrowed by the chain’s reluctance to pay a premium price for acquisitions, which he termed, a “fairly mathematical approach.” He also said May Co. is interested in chains with larger-sized units, which probably eliminates Parisian, Bon Ton and Younkers, as targets. “I don’t think May Co. has many options anymore,” said Loeb. “Other targets are few. Wanamaker’s is a possibility. If any Broadway stores were available, May Co. might go after the northern California units.”
Kernkraut agreed, saying May Co. would probably pursue Broadway’s northern California units and possibly Broadway’s stores in the Southwest, should they go on the selling block.
In a March 14 research report on Broadway, Salomon Bros. analyst Jeffrey Feiner said, “We believe that the possibility exists that Broadway could sell a small portion of the [83] store base in either northern California, or some or all of its store base outside California.”
Kernkraut also said he “fully expects the excess Macy’s properties in the Georgia market would be a compelling acquisition and an attractive means [for May Co.] to enter the potentially lucrative market.”
Although May Co. reportedly made overtures to Mercantile Stores last September. Mercantile acknowledged it was in negotiations with a third party but subsequently said the talks had been terminated without a deal. A source said May Co. was unlikely to make another play for the Fairfield, Ohio-based retailer whose 101 stores generate sales of $2.8 billion annually. “May told Mercantile they wouldn’t give Roger Milliken a seat on the board, they would only pay a certain amount to buy the chain and they wouldn’t go back,” said Schaeffer. “Mercantile called May’s bluff.”
Loeb said, “May is salivating for those [DH] stores; they’re acquisition-minded. The fit for May is perfect. At one point or another, May will pay a little more and Dayton Hudson will accept a little less.”
While Dayton’s has adamantly denied its department stores are up for sale, market reports persist that DH has been seeking a price of about equal to sales — or about $3 billion.
“That seems to be a high valuation,” said Alan Lafer, partner in Lafer Management Corp., a private investment firm in New York. “We think it’s worth about $2 billion, which is roughly seven-times operating income or 67 percent of sales.”
“Based on past dealings between May and Dayton Hudson, the biggest obstacle seems to be price,” said Saul Yaari, analyst at Piper Jaffrey, Minneapolis. “May doesn’t like to pay up. The Dayton Hudson stores are fashion leaders with state-of-the-art systems, which command a premium.”
A sale of the department store group would fuel an accelerated Target rollout. However, real estate constraints have revised Target’s growth plans downward and the expansion can be internally funded.
“They’re hoping to unlock the stock’s value by running the three cylinders well,” Yaari said. “If they can’t do so, I presume management will respond to May’s offers.”
— Fairchild News Service