Byline: David Moin / With contributions from Rusty Williamson, Dallas

NEW YORK — Beleaguered J.C. Penney Co. looks ripe for a takeover.
Penney’s stock price is way down, there’s weakened management with top-level vacancies and vast breakup potential — billions in hidden value with the Eckerd drugstore division, the insurance business, and the direct-to-consumer business, including the small and rapidly growing online business.
And while Penney’s would be a difficult strategic fit for another retailer, a financial buyer may bite. In fact, none other than feared corporate raider Carl Icahn has just taken a significant stake in the Dallas-based Penney’s.
While the number of shares purchased could not be learned, Icahn has filed documents with the Federal Trade Commission outlining his intent to make a formidable investment in the chain. Investors are required by law to inform the FTC if they plan to buy big chunks of a company’s stock so that the agency can make sure that the bid doesn’t violate any antitrust laws.
Icahn, known for his big-money takeover bids of such high-profile companies as Texaco, TWA and Phillips Petroleum Co., was unavailable for comment on Tuesday.
Penney’s confirmed Icahn’s filing.
“His filing, which has cleared the Federal Trade Commission, indicates the intention to acquire an amount exceeding $15 million but less than 15 percent of the outstanding shares, depending upon various factors including market conditions,” according to a Penney’s spokeswoman.
Icahn also serves as chairman of Cadus Pharmaceutical Corporation and American Properties International and president of Foxfield Thoroughbreds, Inc.
Icahn’s latest maneuver is certain to pique wider interest in the investment community. It could even trigger investments in other retail and fashion stocks which, like Penney’s, are widely underpriced and at or near their 52-week lows. As reported in these columns Tuesday, Texas billionaire Sid Bass bought an 8.5 percent in Warnaco Group, another down-and-out stock.
Penney’s closed at 18 1/4 Tuesday on the New York Stock Exchange, down 3/4. The stock has ranged from 54 7/16 to 12 7/8 in the past year.
“If Icahn is investing in J.C. Penney, he probably believes what a lot of people already believe — that there is value in the stock,” observed Gil Harrison, chairman of the Financo investment firm.
“There are investors out there who feel many [other] places in the market are overvalued. Tech stocks, for example, are off the wall,” Harrison noted. “But there are basic companies [such as Penney’s] that have their ups and downs, and they are not going to go away. Penney’s has some very strong pieces, including drug stores, direct mail and e-commerce.”
“Carl Icahn has a history of picking out what he perceives as undervalued companies, or companies where the sum of the parts is equal to more than the whole,” said Arnold Aronson, managing director of retail strategies, Kurt Salmon Associates.
In the case of Penney’s, Aronson noted, the price/earnings ratio is low, at around 16.2. “The book value of the company is a lot bigger than the market price,” he said.
“With this type of investors, the Sid Basses of the world, their business is looking for value opportunities. It doesn’t make too much difference what the industry is,” Aronson said.
Icahn, president and chairman of Icahn & Co., is no stranger to retail fashion stocks. He quietly became a major investor in Salant Corp. two years ago, and engaged in a three-way battle to take over Marshall Field’s in the early Eighties. He lost out to Batus Inc., but walked away with millions from his investment. Carter Hawley Hale was also in the takeover battle. Field’s is part of Target Corp. currently.
Icahn tried to take over RJR Nabisco and failed there too, but did take over and run TWA for years without getting it back on track. TWA is currently employee-owned.
“He’s tough and aggressive,” said a source. Asked about Icahn’s track record in rebuilding companies, the source said, “He’s a transaction-oriented guy, great at being able to cash out of the situation.”
Wall Street analysts see similarities between Penney’s and TWA. Both have big cash flows and are household names that have lost some luster. Both face execution problems, feel the pain of more nimble competitors, and for years posted profit performances trailing their sectors.
The questions are whether Icahn will take larger stakes in Penney’s over time and whether he wants to exert operating influence, as he did at TWA as chairman, or whether he’s into Penney’s for a quick buck. In any case, his presence usually creates investor interest.
“He’s like a vulture looking for dead meat, and nobody has taken the meat off the bones of Penney’s yet,” said another source.
Still, “Penney’s is not a reclamation case,” Aronson said. “It has the potential to grow and cure itself. It’s a company in transition, where a lot of good things have been done. Penney’s has very good locations, mall dominance and is still a good name, and [management] hasn’t had its head in the sand. In some areas, they deliver. The performance in e-commerce is good. They stayed in the catalog business [unlike archrival Sears] and the company is now benefiting by being able to fulfill e-commerce orders, and it got out of low margin businesses.” Aronson also cited the Arizona private label brand as a strong merchandise differentiator.
However, it is widely believed in industry circles that much of Penney’s merchandise is overpriced and not as current and fashionable as the competition’s. Other companies, like Kohl’s, are believed by some observers to do a better job selling apparel to the same demographic, largely middle-income consumers.
Also, Penney’s needs talent, with a search for a ceo currently being conducted by Spencer Stewart search firm. James Oesterreicher, chairman and ceo, announced his retirement last Friday amid stockholders’ and analysts’ frustration with the chain.
There is also a search for chief operating officer of Eckerd, to succeed Frank Newman, who left last March to join, an Internet drug store. The Eckerd search is being conducted by Herbert Mines Associates. That individual would also be named executive vice president of the corporation.
By largely promoting from within its ranks for decades, Penney’s now has a huge opportunity to recruit from the outside.
Within the divisions, there’s value. According to Rosemary Sisson, director of corporate bond research, UBS Warburg, Penney’s insurance business, which the company is seeking to sell, could be valued at over $2 billion. Penney’s said on May 3 that it would explore selling all or part of DMS which markets life, health, accident, supplemental hospital and credit insurance, among other services, and accounted for 26 percent of operating earnings in 1999.
She said that Eckerd “is worth more than it’s getting credit for,” though she also said that it needs some fixing. “The margins are not as profitable as Walgreen or CVS.” Penney’s is considering issuing a tracking stock for Eckerd. The division did $12.4 billion in sales last year. Operating earnings were 1.5 percent and EBITDA was only 3 percent, while competitors were around twice as much.
Sisson said Eckerd could be valued at $2.5 billion, but noted the possibility of Penney’s selling a piece of it to the public through an IPO.
The core 1,140-unit Penney’s chain and catalog combined posted $19 billion in sales last year, EBITDA of around $1.2 billion, and would be valued at around $6 billion, Sisson said.
As for buying Penney’s in its entirely, Sisson said a financial buyer would be more likely than a retailer. “Strategically, I don’t think [a retailer] makes sense,” she said.
Aside from trying to integrate the huge Penney’s business, fixing Penney’s would require surmounting several hurdles. “There’s a lot to fix here,” she said. “Penney’s has a whole lot of stores and is a well-recognized name, though there is some confusion from the consumer perspective. The image is blurred.”
Consequently, sales at Penney’s have declined precipitously for at least five years, as the stock lost about two-thirds its value in the last year or so.
Ironically, there’s been an uptick in recent weeks. April comp-store sales rose 3.4 percent, with apparel among the bestsellers.