November 17, 2004

Kmart Buying Sears in $11 Billion Deal

NEW YORK (Reuters) - Discount retailer Kmart Holding Corp. will buy department store operator Sears, Roebuck & Co. in a surprise $11 billion deal that creates the third-largest U.S. retailer, the companies said on Wednesday.

The new company, Sears Holdings, will have about $55 billion in annual revenue and nearly 3,500 retail stores.

The companies, both of which have been struggling, said in a joint statement the merger, expected to be finalized by next March, was expected to generate significant cost savings but could also trigger sales of "nonstrategic real estate assets.

The deal came as a surprise to many analysts, who were uncertain of the motives behind the merger.

"They both bring to the table diverse opportunities, but it's not clear if they are merging to make them more able to stand up to Wal-Mart's greater strength or if this is a real estate deal," said Kurt Barnard, president of the Retail Consulting Group.

Sears shares jumped more than 12 percent in pre-market trading, while Kmart shares advanced 2.75 percent.

Kmart shareholders will receive one share of new Sears Holdings common stock for each Kmart share; Sears shareholders will have the right to choose either $50 in cash or 0.5 share of Sears Holdings for each Sears share.

The $50-per-share cash price represents a premium of 10.6 percent over Sears' closing price of $45.20 on the New York Stock Exchange on Tuesday.

Based on Kmart's closing price of $101.22 on Nasdaq on Tuesday, the stock swap values Sears at $50.60 a share, a premium of nearly 12 percent over its Tuesday close.

Sears shares have rocketed higher over the past two weeks after it was revealed that real estate investment trust Vornado Realty Trust Inc. had acquired a 4.3 percent stake in the company.


Analysts said the deal highlighted the value of Sears' vast property holdings -- with the value of retail real estate rising -- and indicated other retailers could be potential buyers of real estate owned by Sears or other department stores.

Hedge fund ESL Investments Inc., which is run by well-known investor Edward Lampert, is the largest shareholder in both Kmart and Sears. Lampert took Kmart out of bankruptcy last year and has sold off some of its real estate, building up a huge cash pile.

Lampert will be chairman of Sears Holdings, while Alan Lacy, current chairman and chief executive of Sears, will be chief executive of the new company.

Kmart's current chief executive, Aylwin Lewis, will be president of Sears Holdings and chief executive officer of Sears Retail. The new company's chief financial officer will be Glenn Richter, who is now Sears' CFO.

The deal has already received unanimous approval from both companies' boards of directors.

Lampert said the combination of Kmart and Sears was compelling for customers, associates and shareholders.

"It will create a powerful leader in the retail industry, with greatly expanded points of distribution, leading proprietary home and apparel brands, and significant opportunities for improved scale and operating efficiencies," he said in the statement.

The merger is expected to generate $500 million in annual cost and revenue synergies, which will be fully realized after three years. It is also expected to boost earnings per share "significantly" in the first year, before restructuring costs.

Sears Holdings will have its headquarters in Hoffman Estates, Illinois, while Kmart will continue to have a significant presence in Troy, Michigan.

Kmart Buying Sears in $11 Billion Deal

CHICAGO (AP) - The discounter Kmart Holding Corp. is acquiring one of the most venerable names in U.S. retailing, the department store operator Sears, Roebuck & Co., in a surprise $11 billion deal that will create the nation's third largest general merchandise retailer.

The combined company under Wednesday's deal would be known as Sears Holdings Corp., but it was clearly orchestrated by Kmart chairman and Sears shareholder Edward Lampert who will lead a new board that will be dominated by Kmart directors.

Shares of both companies surged on news of the deal. Kmart shares climbed $15.80, or 16 percent, to $117.02 on the Nasdaq Stock Market while Sears shares soared $9.70, or 21 percent, to $54.90 on the New York Stock Exchange.

The deal marks a remarkable comeback for Kmart, a company once known for its "Blue Light Specials," that scaled back its operations after seeking bankruptcy protection in 2002. Sears' roots date to the late 1800s when it offered merchandise by mail order to farmers, opened its first retail store in 1925 and eventually became the nation's biggest department store operator.

The new company is expected to have $55 billion in annual revenues and 3,500 outlets. That will mean it will trail only Wal-Mart Stores Inc. and Target Corp. among the biggest U.S. general merchandise retailers.

The new company plans to operate the Kmart and Sears businesses under their current brand names.

It will be headquartered in the northwestern Chicago suburb of Hoffman Estates, where Sears has its headquarters, but will maintain a "significant presence" in Troy, Mich., where Kmart is based.

Under the agreement, which was unanimously approved by both companies' boards of directors, Kmart shareholders will receive one share of new Sears Holdings stock for each Kmart share. Sears, Roebuck shareholders can choose $50 in cash or half a share of Sears Holdings stock. That portion of the deal values Sears shares at $11 billion, a 10.6 percent premium over its value at Tuesday's close.

Kmart chairman Lampert will be the chairman of Sears Holdings, while Sears CEO Alan Lacy will be vice chairman and CEO of the new company. The new 10-member Sears Holdings board will have seven members from Kmart and three from Sears.

"The merger will enable us to manage the businesses of Sears and Kmart to produce a higher return than either company could achieve on its own," Lampert said in a press release.

Lampert, Kmart's majority shareholder, is also Sears' largest shareholder, holding a 15 percent stake in Sears through his ESL Investments Inc.

The merger, expected to close by the end of March 2005, is subject to approval by Kmart and Sears shareholders, regulatory approvals and customary closing conditions.

Kmart filed for Chapter 11 bankruptcy protection in early 2002, leading to the closing of about 600 stores, termination of 57,000 Kmart employees and cancellation of company stock. The retailer emerged from bankruptcy in May 2003 and in March posted its first profitable quarter in three years.

Mired in a retail slump, Sears had long fallen out of favor on Wall Street after losing ground to competitors and enduring sluggish sales for years. The company last fall introduced its Sears Grand stores, which offer grocery and convenience items besides traditional Sears fare such as clothing, home appliances and tools. The concept had delivered promising results for the struggling retailer at its first three stores in metropolitan Salt Lake City, Las Vegas and Chicago, in the suburb of Gurnee.

Kmart, in recent years, has been shedding many of its underperforming stores, a strategy that has helped the once-struggling discount retailer bounce back after it emerged from bankruptcy. Kmart recently agreed to sell 50 stores to Sears for $575 million as part of that strategy.

Kmart's earnings have been improving. On Wednesday, Kmart posted net income in the third quarter ended Oct. 27 of $553 million, or $5.45 per share, compared with a loss of $23 million, or 26 cents per share, for the same period a year ago.

Its stock price has risen nearly seven-fold to $101.22 on Tuesday from $15 a share when it emerged from bankruptcy.

In recent weeks, it appeared that Sears could be shifting toward a similar real estate strategy after the disclosure that Vornado Realty Trust, a real estate investment trust, had purchased a 4.3 percent interest in the department-store chain. That move left the impression that the value of Sears' real estate holdings may be not be fully reflected in its stock price. Since that Nov. 5 announcement, Sears' stock has jumped 25 percent. It closed at $45.20 in trading Tuesday on the New York Stock Exchange.

Company officials said the merger would help make their properties more profitable through a broader retail presence and improved operational efficiency in areas such as procurement, marketing, information technology and supply chain management.

"The combination will greatly strengthen both the Sears and Kmart franchises by accelerating the Sears off-mall growth strategy and enhancing the brand portfolio of both companies," Lacy said. "This will clearly be a win for both companies' customers while significantly enhancing value for all shareholders."

The merger will not affect agreements to carry home and fashion lines including Martha Stewart Everyday, Lands' End and Sesame Street, the companies said.

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