Byline: DAVID MOIN With contributions from RICH WILNER

NEW YORK — The Federated/Macy’s drama continues, with an anxious industry awaiting the outcome of a series of intense top-level meetings between the two companies.
The board of R.H. Macy & Co. reportedly will meet this morning to discuss and possibly vote in favor of a merger with Federated Department Stores, a suitor it had spurned for months.
For the last week, several executives close to the negotiations have predicted Federated would prevail in its efforts to create a $14 billion department store giant, which would rank as the nation’s sixth largest chain.
The Macy board meeting is scheduled for 9 a.m. at the Herald Square flagship, a source said, adding: “You can bet they are going to vote for the merger.”
The urgency of the meeting was underscored
by a report that Roger N. Farah, president and chief operating officer of Macy’s and a member of the board, canceled merchandising meetings with high-level Macy’s East staff scheduled through the week.
Last Friday, the Macy board was poised to vote down the merger. But subsequent events unfolded rapidly.
Just 12 hours prior to the vote, Macy bondholders — the sole creditor group supporting the Macy stand-alone effort — withdrew that support. The board met as scheduled but postponed a vote when it learned Friday morning of the bondholders’ new loyalties.
The bondholders apparently switched their allegiance to Federated after the Cincinnati-based retailer sweetened its proposed payout to them to $475 million from $400 million.
Officially, the bondholders’ committee has still not committed itself to either side, but significant progress in talks with Federated has been made.
On Wednesday, Macy’s had no comment. The last public word from the company came Friday, when it said it still intended to file the stand-alone plan and tentatively planned to meet on July 22. Since then, however, director — perhaps sensing the futility of filing a plan without the support of any creditor group — might have swung in favor of a merger, causing them to speed up the timetable.
Macy’s stand-alone plan, without support from any of the creditor groups, would have little chance of finding approval in bankruptcy court. Senior creditors — and, according to sources, trade creditors — had previously come out in support of Federated’s proposal.
A board action endorsing a merger could speed a consensual plan into the hands of the creditors who must vote on it and then get it confirmed in court, a process that normally takes two to three months.
Macy’s exclusivity, which expires Aug. 1, could be lifted by Bankruptcy Judge Burton R. Lifland, enabling all parties to go ahead with the new plan.
To draw up a consensual plan, antitrust, employment and operational issues, which at times have been debated, must be resolved.
Federated and Macy officials and financial advisers have been negotiating for a week. They have also met with Cyrus Vance, the court-appointed mediator.
The talks, held on neutral grounds between Allen I. Questrom and Myron E. Ullman, the chairmen and chief executives of Federated and Macy’s, respectively, were said to be continuing Wednesday. They also met Tuesday, reportedly from 4 p.m. to about 9:30 p.m.
A source close to Federated said Tuesday that Ullman has softened his position and might be leaning toward a merger after being advised by Macy’s lead attorney, Harvey Miller, and after meeting with Questrom. There were also reports this week that Questrom has been communicating frequently with Laurence Tisch, CBS chairman and a Macy director, in attempts to alleviate concerns among board members about a merger.
“We are in continuing discussions with Macy’s and beyond that the mediator has asked both parties not to comment,” a Federated spokeswoman said Wednesday.
If Macy’s does merge with Federated, the combined $14 billion business would gain enormous buying clout and competitive advantages against key rivals May Department Stores, which last year exceeded $11 billion in volume, and Dillard Department Stores, which last year posted $5.1 billion in sales.
Only five retail corporations in the U.S. would have higher volumes than a new Federated/Macy’s: Wal-Mart, Kmart, Sears, J.C. Penney and Dayton Hudson.
A merger agreement, which would end Macy’s 2 1/2-year bankruptcy, would be greeted with a sigh of relief by Macy creditors.
However, suppliers and Macy and Federated employees have a lot to worry about. Layoffs and consolidations are expected, putting hundreds — perhaps thousands — of employees out of work and leaving fewer doors for vendors.
There is also concern on Wall Street that Federated’s stock could slip further. Federated’s sales have been weak recently and the stock has been hovering around $21 after hitting a high of $25 in the last year. Traded on the New York Stock Exchange, it closed Wednesday unchanged at $20.25.
In the less-likely event the board either tables the merger issue or votes it down today, Federated reportedly is ready to take the battle to court to fight Macy’s exclusivity and has a motion already drawn up.
Meanwhile, the bondholders’ financial advisers on Wednesday continued to talk with Federated’s advisers in hopes of arriving at an agreement. For bondholders, that means a still higher offer from Federated. For Federated, it means winning the group’s support, which would make a Macy board vote academic.

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