NEW YORK — Federated is still on the hunt.

After losing its bid for Marshall Field’s to May Department Stores, Federated Department Stores remains eager to make acquisitions — and it could even snare a prize such as Neiman Marcus.

This story first appeared in the June 28, 2004 issue of WWD. Subscribe Today.

Analysts and executives close to these companies also say Federated, which has more than $900 million cash on hand, might make a grab for Dillard’s or Nordstrom.

“With Marshall Field’s going to May, this leaves an extremely cash-rich suitor standing on the sidelines: Federated,” said Dana Cohen, analyst for Banc of America Securities, in a recent research note. “As of the end of the first quarter, Federated had a whopping $913 million of cash on the balance sheet. In addition, the company has a history of successful department store acquisitions in the past, most recently the Hawaii-based Liberty House in June 2001.”

One retail analyst, who works closely with major department stores, said if Federated could pry Neiman Marcus from its owners, the Smith family, it “would be quite a catch” that “Wall Street would applaud.”

“Knowing the Smiths and knowing Terry [Lundgren, chief executive officer of Federated], the whole thing is intriguing,” said a retail executive.

Considering the size of the Field’s buy — $3.2 billion — May has a lot to digest, so the next takeover move is likely to come from Federated. However, it will be tougher to find a retailer with as much cachet as Field’s, or one that fits cleanly into the corporate fold of Federated, which includes flags such as Macy’s and Bloomingdale’s. Also, Federated’s game plan of growing its market position is going well. With the wind at its back, the company can be patient before pouncing on a deal.

“This doesn’t have to be a game of chess,” said one chief executive whose company competes with May and Federated. “In the acquisition game, you can move twice in a row if you want to.”

Making a play for Dillard’s, Neiman Marcus or Nordstrom would be difficult for Federated. None of these retailers is for sale, at least officially, and all are family controlled. However, Dillard’s, a traditional department store, would give Federated greater penetration in the South, and makes more sense for Federated rather than May, since May has more coverage in Dillard’s territory through its Foley’s and Famous-Barr divisions.

Neiman Marcus and Nordstrom would give Federated a different merchandise slant toward much more luxury, and a broader customer base, without too much merchandise duplication.

Some see regional chains, such as Belk’s, Gottschalk’s or Bon-Ton, as takeover targets, given their limited growth potential and uneven performances. But regionals operate many stores with less square footage compared with Federated stores, and are situated in smaller markets, while Federated generally operates big boxes in dense, urban areas.

After the Marshall Field’s acquisition, Banc of America’s Cohen upgraded Dillard’s to “neutral” and raised target prices from $10 to $21, based on Dillard’s newfound appeal as a possible acquisition target.

“Federated is always in the market for something,” said Carol Sanger, vice president of corporate communications and external affairs. “We walk away from more opportunities than we actually explore.”

From a seller’s perspective, a takeover of Neiman’s is ideal. The luxury retailer has delivered robust same-store sales: May showed a gain of 8.5 percent, April was up 14 percent and March jumped 25.7 percent. Meanwhile, shares of the retailer have been riding around $55, which is close to its 52-week high of $59.

But a buyer would have to convince the Smith family to give up its stake. The family holds more than 25 percent of Neiman’s total common stock. More important, they own 62.5 percent of the company’s class B shares, which effectively gives them control of the board of directors.

“The Smiths like Terry a lot, and were angry when he left Neiman’s,” the retail executive added. From 1988 to 1994, Lundgren was at Neiman Marcus in Dallas, serving first as executive vice president of stores and then, in 1990, as chairman and ceo.

As far as targeting Dillard’s, “I don’t feel it,” the executive said. “The stores need a huge amount of capital, though they have some good locations. But I don’t see losing Marshall Field’s as stopping Terry from acquisitions. If you are going to sell Neiman’s, this is when you sell it. Neiman’s is at the top of its game.”

“I’d be shocked to see Dillard’s sold,” said a high-level retailer in the South. “The family still controls the voting stock and they are passionate about the business. I can’t imagine they would decide they don’t want to do the business anymore. They run the business because they love it.”

As for Belk’s, “they’re not for sale,” said the source. “While Belk’s has a strong position in a region of the country, they operate a lot of small stores in smaller markets, which would be a departure for Federated. Dillard’s has good-size stores, but they are also in smaller markets than Federated is accustomed to.”

Mark Bienstock, executive vice president of DCD Capital, said Federated shouldn’t feel any pressure to make an acquisition. “I do think they will be looking for selective fill-ins as the opportunities arise, and I believe they’ll be looking for opportunities that provide geographic synergies for them.”

Emmanuel Weintraub, an industry consultant of the firm that bears his name, said, “In this economic environment, the available players are few and far between, so Federated shouldn’t be chasing any deals. The opportunities will show themselves. This is not a time to weaken one’s balance sheet.”

Arnold Aronson, a consultant at Kurt Salmon Associates, also said Federated doesn’t have to do anything.

“The Marshall Field’s transaction doesn’t leave Federated in a position that is different from what it was before the acquisition. Marshall Field’s was a competitor and remains one. The only difference is that it now has a new owner,” he said.

“I think Federated has instigated so many positive initiatives in trying to upgrade itself. They’re on a very proper course that is consistent with upgrading their entire corporation. They don’t need to do anything reactive because Federated can continue to grow organically,” Aronson said.

With its Field’s buy, May now eclipses Federated in total volume — $15.94 billion versus $15.26 billion. It gives May bragging rights to say it’s bigger. However, retailers said that $600 million in volume isn’t a big enough differential for the marketplace or for consumers.

“It’s not a sizable enough difference to give May a huge amount more clout,” said the retailer from the South. “Whether a company is $15 billion or $16 billion isn’t going to leverage a whole lot more for you. Being 5 or 10 percent larger is not substantial. What really matters is a relationship to resources and the ability to sell the goods.”

However, another source close to May Co. said, “Psychologically, it means a lot to be the number one versus number two. It gives you a lot more clout, particularly in this case — Marshall Field’s gives May access to a whole host of better vendors. The market has to take May Co. seriously in a different way. There is a new vendor structure that previously had nothing to do with May.”

Asked about the volume issue, Federated’s Sanger said, “It doesn’t make a difference to us. When we were the largest department store, we didn’t promote ourselves that way. We said we were one of the largest department stores. Being a better department store is more important than being a bigger department store.”

— With contributions from Jeanine Poggi

Purchasing Power
Federated’s got a lot of what it takes to get along
Cash: $913 million (1)
Operating Cash Flow: $1.59 billion (2)
Market Capitalization: $8.87 billion (3)
Source: Company reports, Yahoo! Finance
(1) most recent quarter (2) trailing 12 months (3) as of June 25
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