May buys Field's from Target

DSN Retailing Today, June 21, 2004 by Laura Heller

MINNEAPOLIS AND ST. LOUIS -- Target Corp., has delivered at least in part on its intent to divest its ancillary divisions with the sale of Marshall Field's and several Mervyn's stores. After months--some would say years--of speculation, Target has finally unloaded its ailing department store division to the highest bidder, May Department Stores.

May will pay $3.24 billion, a higher figure than most analysts anticipated and more than the $1.8 billion price tag Target itself had placed on the business, the result of a reported bidding war between May and rival Federated Department stores.

May has bagged 62 stores located largely in three metropolitan areas: Chicago, Detroit and Minneapolis. Field's largely Midwestern presence provides May with stores in previously underserved or unserved areas and a large flagship location in Marshall Field's State Street store in Chicago, something competitor Federated already boasts with its Macy's Herald Square location in New York.

Target had begun implementing changes at the State Street location that brought in name brand outside vendors, both local and international, as boutique shops within stores similar to London's Harrods department store. Some of those changes were to be extended to other locations and May plans to use both the flagship unit and the Field's chain overall as a learning lab, according to Gene Kahn, chairman and ceo of May.

"This gives May a position of power with the integration of a nationally recognized brand in three metropolitan markets," said Kahn. "These are big, powerful stores and laboratories for learning."

Although May came out of the process with Marshall Field's, it might have done some damage to its standing on Wall Street, not to mention its credit rating. Field's has experienced declining sales since 1999, and in spite of recent bright spots, improving operating performance could be an uphill battle.

For its part, May's management believes it can apply operational synergies among its chains to rectify lagging sales and profits and analysts largely agree the company has done a capable job of integrating, improving and managing prior acquisitions. What they don't agree on, however, is the benefits of the acquisition to May's bottom line.

"We were surprised by the purchase price of the transaction," said Merrill Lynch's Stacy Turnoff. Field's had previously placed a book price of $1.8 billion on the division and while analysts expected the actual sale to yield closer to $2 billion, due to interest from both May and Federated, the $3.24 billion took many off guard.

"However, given May's larger exposure to the area versus its direct competitor, Federated, and therefore, more synergies, it makes sense that May was willing to pay a higher premium," said Turnoff. "Additionally, May has historically done well at managing expenses and making successful acquisitions."

The purchase is to be financed almost entirely by debt, a point expected to knock down May's credit rating a notch. But Kahn told analysts the company anticipated that the acquisition will add $85 million earnings in 2004 and $140 million by 2005. "That adds 20% to our volume," he said.

With the addition of nine Mervyn's locations in the sale, the estimated purchase price for Marshall Field's comes in at a little more than $3 billion. The Mervyn's stores, all located in the Minneapolis market, are expected to be converted to May stores.

There are still 257 Mervyn's locations left at Target, which are expected to be sold separately or liquidated. Disposing of this chain will be much more difficult for its parent company and could still be considered a liability.

"The market is certainly aware that Mervyn's is a far less attractive franchise than Field's but the result is that the purchase price, not to mention the buyer, is a lot less clear," said Sanford Bernstein analyst Emme Kozloff. "An underwhelming offer that is accepted could easily reverse the earnings accretion from Field's. Additionally, unacceptable bids could leave Target saddled for longer with the Mervyn's franchise, potentially frustrating investors for a while."