Macy's owner to buy May Department Stores

By: EDMOND JACOBY - Staff Writer | Monday, February 28, 2005 9:41 PM PST ∞

NORTH COUNTY ---- The $17 billion merger of Federated Department Stores Inc. and The May Department Stores Co. is likely to change the retail landscape, and could open North County shopping malls to merchandisers that are usually encountered in stand-alone settings, according to a San Marcos-based retail consultant.

The takeover by Federated of St. Louis-based May, which operates 491 department stores under the names Robinson-May, Lord & Taylor, Marshall Field's, Hecht's, Filene's and Foley's and nearly 700 formalwear and bridal stores under the names After Hours and David's, involves some $11 billion in cash and Federated stock plus assumption of $6 billion of May debt.

Federated, headquartered in Cincinnati, is the owner of Macy's, Bloomingdales, Bon Marche, Burdines, Goldsmith's, Lazarus and Rich's, most of which have have been rebranded Macy's. The combination with May will make Federated the nation's fourth largest general merchandise retailer, after Wal-Mart Stores Inc., Target Corp. and Sears Holdings Corp. The deal took two years to put together after first word of discussions between the two companies became public.

"I think one of the things that Federated is going to do is brand all of these stores as Macy's," said George Whalin, president of Retail Management Consultants in San Marcos.

Ironically, according to Whalin, in North County those could be the very beneficiaries if Federated opted out of some of the space occupied by both Macy's and Robinson-May at the two local regional malls, Westfield Shoppingtown North County and Westfield Shoppingtown Plaza Camino Real.

At the North County center in Escondido there are two Robinson-May stores and one Macy's, while at Plaza Camino Real the reverse is true, there are two Macy's and one Robinson-May. Whalin thinks it unlikely Federated would want three Macy's at either mall.

"They may keep a few Bloomingdale's, and maybe Marshall Fields on State Street in Chicago won't be changed; but I have no doubt we're going to see a nationwide presence of 800 or so department stores with the same brand name," Whalin said.

The key advantages of a uniform brand include customer name recognition, increased buying power and a strengthened hand in negotiating real estate and advertising contracts.

"They've already shown that they want to have a single national brand, so I think that all of these stores in the next two or three years will be the same," Whalin said.

Industry watchers say the government ---- particularly individual states ---- may raise concerns about shopping malls anchored by both Federated and May, a situation that could give the retailer tremendous clout in cities where it is the only seller of certain goods.

That could mean store closures or divestitures, though company officials downplayed the matter during a conference call Monday. Federated Chief Financial Officer Karen Hoguet said the overlap between the two companies "is actually quite minor." Industry watchers say that could mean up to 90 stores, or as few as 30 stores.

Most analysts also said that, save negligible moves in certain markets, regulatory issues wouldn't sink the deal.

The deal comes during a period of shrinking power for big department stores hurt by the explosive growth of so-called big box retailers such as Wal-Mart Stores Inc. and Target Corp.

"It's going to change the nature of the malls, but it's not going to be detrimental to the malls," Whalin said.

"There are plenty of stores that would like the space," he said. "Wal-Mart has proven in the last 18 months or so that it can do very well in a mall setting, and Kohl's and Target would probably do very well there."

Federated's decision to purchase May likely will result in store closings, which could affect some real estate investment trusts that specialize in malls.

About 10 percent of malls in the United States have stores operated by both Federated and May, although that percentage ticks up to 13 percent among malls owned by REITs, according to buy-side analyst Greg Andrews, from REIT research firm Green Street Advisors of Newport Beach in a note.

Shares of the REITs were not affected by the merger.

Mall-owner Westfield Group of Australia ---- the owner of both North County malls ---- has potentially the biggest exposure to store closings as 22 percent of its malls contain both operators, Andrews said.

Market experts expect the retailers will start closing underperforming and duplicate stores. Banc of America retail analyst Dana Cohen predicts about 50 stores will be shuttered.

The direct impact from store closings should be small, as most anchors own their stores or pay little rent, Banc of America Securities analyst Ross Nussbaum said in a note. However, a store going dark could affect traffic to the rest of the mall.

"Any loss would be indirectly felt as specialty shops that depend on the drawing power of the department store suffer," said Andrews.

The Associated Press contributed to this story. Contact staff writer Edmond Jacoby at (760) 739-6675 or ejacoby@nctimes.com.