WALL STREET GIVES THE DEAL TWO THUMBS UP
Byline: RICH WILNER
NEW YORK — Wall Street cheered retailing’s mega-merger Thursday, saying Federated/Macy’s fat pencil will mean bigger profits for the company and better values for consumers.
Analysts said if Federated Department Stores wrings out cost savings, the postmerger company could be a good buy. Federated closed Thursday at 20 5/8, up 3/8 in trading on the New York Stock Exchange, and one analyst, who spoke on the condition of anonymity, said he saw Federated stock soaring to $33 to $35 a share in 12 months.
The $4.1 billion consensual plan to be filed Aug. 1 will include $1.95 billion in debt and $1.8 billion in stock, Federated and Macy said Thursday. It will also include $378.3 million in cash.
The debt includes $963.3 million in unsecured notes, $713.9 million in mortgage debt and $267.8 million in deferred tax obligations.
Under the plan, $1.12 billion in stock will be distributed subject to certain formulas related to the trading price of Federated common stock, along with $125 million in five-year and seven-year warrants.
Edward F. Johnson, at Johnson Redbook Service, said both companies are operating lean, having gone through bankruptcies, helping them handle the high debt load needed to complete the merger.
“They both got rid of a lot of dead wood in each of their bankruptcies and should avoid falling back into bankruptcy. The higher interest costs will hurt them at first, but earnings should bloom later,” he said.
Analysts expect high interest costs from the merger to dilute Federated’s earnings in 1994 and 1995 but expect earnings to blossom once synergies are realized.
Rosemary Sisson, vice president at Salomon Brothers Inc., New York, said the merger was good news for consumers because the new chain would wield more clout with vendors and thus be able to deliver better value to consumers.
Sisson dismissed the notion that the merger would result in less competition and predicted Federated would be able to run a “tight, successful ship.”
“In as competitive an industry as retailing, size is important because it means clout with vendors and in private label. That means more value to customers,” she added. “The larger the corporation, the better to leverage the costs of technology and people. It will help make the bottom line bigger.
“It’s marvelous for American retailing,” said Laurence C. Leeds Jr., managing director at Buckingham Research. “The synergies are more profound than meets the eye. Both are more similar than dissimilar, and both have excellent management.”
“The future of department store retailing is alliances and mergers,” said Peter N. Schaeffer, at Dillon Reed. “I don’t know if the merger was best for creditors and consumers, but it was inevitable.”
Salomon’s Sisson said she expects Federated to experience some bumpy periods ahead, but she noted that May Department Stores got bumped around through its mergers and is now doing “an excellent job” in a large operation. May Co. merged with Associated Dry Goods in 1986.
Sisson said it would be wrong to view the competition at retail as simply department stores versus department stores. “Specialty stores and discounters now compete in the same arena,” she said, “People shop where they think they will get the best value, without worrying about what it says on the side of their shopping bag. People don’t want to be taken.”
Most analysts agreed with long-held market speculation that A&S and Macy’s would merge and look for either May Co. or Dillard Department Stores Inc. to acquire Macy’s stores in Atlanta.
As in most mergers, analysts look for significant layoffs at the corporate level. Store closings will add to the ranks of unemployed.
Schaeffer expects May Co. and Dillard “will continue their aggressive pursuit of other chains to increase their arsenal.” “The days of the independent department store are over,” Schaeffer said.
“It’s going to be a powerhouse,” said David A. Poneman, at Sanford C. Bernstein & Co. He expects Macy’s stores will benefit from gaining a better capital-spending plan.
— Fairchild News Service