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CHICAGO (AFX) - Shares of two of the nation's biggest retailers charged
ahead in early trading Wednesday as investors embraced to merge Sears Roebuck &
Co. and Kmart Holding Corp. teaming up in a deal valued at $11 billion.
The merger of Troy, Mich.-based Kmart and Hoffman Estates, Ill.-based Sears
promises to shake up the U.S. retail industry.
Sears shares zipped ahead 21 percent, or 9.41, to $54.60 while Kmart's were up
16 percent, or $15.16, to $116.50.
Investors greeted word of the deal, with Sears' shares vaulting 18 percent to
$53.25 in pre-market trading while Kmart jumped 9.6 percent to $110.98.
The merger will give rise to a company named Sears Holdings Corp., which the
parties said will rank as the No. 3 U.S. retailer -- after Wal-Mart Stores Inc.
and Target Corp. -- with approximately $55 billion in annual revenue as well
as national footprint of nearly 3,500 retail stores.
"The move indicates there's going to be further consolidation in the retail
industry, and that should strengthen retailers going forward," said Peter
Cardillo, chief market analyst and strategist at S.W. Bach.
"I think, in general, this is good news for the group and obviously there's
value here and any time value is added to the equation it's positive," Cardillo
said.
UBS analyst Gary Balter, however, was more equivocal.
"In either a very bold or foolish move, Kmart announced that they are merging
with Sears effectively ending Part 1 of the Kmart story," said Balter in a note
to clients. "Whether putting together two struggling retailers will create
enough value and synergies to make a good retailer is a major question."
The Sears and Kmart businesses will continue to operate separately under their
respective brand names.
Terms and conditions
The merger, expected to close by the end of March 2005, is subject to
shareholder approval, regulatory clearance and customary closing conditions.
Terms of the definitive agreement call for Kmart stockholders to receive one
share of Sears Holdings common stock for each of their Kmart shares. In
addition, Sears's stockholders will have the right to elect payment of $50 in
cash or 0.5 shares of Sears Holdings for each Sears share.
Half a Sears Holdings share is valued at $50.61 based on Tuesday's $101.22
closing price for Kmart shares.
The deal represents a premium of more than 10 percent for Sears shareholders
based on Tuesday's closing price of $45.20.
On a prorated basis, 55 percent of outstanding Sears shares will be converted
into Sears Holdings shares and 45 percent will be converted into cash.
ESL Investments and its affiliates, controlled by Kmart chairman and major
shareholder Edward Lampert, have agreed to vote all Kmart and Sears shares they
own in favor of the merger.
Balter pointed out that Kmart's shareholders may not appreciate the merger.
"The hope in Kmart was that ESL would take a bold move with the cash and start
to invest in future growth opportunities," Balter said. "This is not the type of
move that we were looking for to create the next leg of value for Kmart
shareholders."
Sears Holdings will have its headquarters in Hoffman Estates, but Kmart will
maintain what the companies called "a significant presence" at its Troy offices.
Plans also call for Sears Holdings to sell off "non-strategic real-estate assets
as appropriate," the companies said.
In August, Kmart said it would layoff just over 200 employees from its
Troy-based headquarters staff.
Combining the two companies is "conservatively" estimated to generate $500
million of annualized cost and revenue synergies, which Kmart and Sears expect
to fully realize by the end of the third year after closing.
In particular, annual cost savings of more than $300 million are expected to be
realized via efficiencies of scale in merchandising, purchasing and
supply-chain, administrative and operational activities.
Moreover, the companies expect to realize some $200 million in incremental gross
margin via cross-selling opportunities and the conversion of many off-mall Kmart
stores to the Sears nameplate.
The merger, analyst Balter said, is seen as posing a potential threat to many
other retailers, particularly in the home-improvement channel -- and even mighty
Wal-Mart.
"This move effectively adds a new hardlines competitor in 1,300 stores
overnight, which is a negative primarily for the home-improvement retailers and
to the extent that the brands in Kmart drive traffic, Wal-Mart," he said.
Importance of real estate
Lampert will serve as chairman of Sears Holdings, while Alan Lacy, Sears'
chairman and chief executive, will become vice chairman and CEO. Aylwin Lewis,
currently president and CEO of Kmart, will be president of Sears Holdings and
CEO of Sears Retail.
The three executives will also make up an Office of the Chairman that Sears
Holdings will establish, supported by a 10-member board of directors. Seven
members of Kmart's board will sit on the Sears Holdings board, along with three
members of Sears' board.
"The combination of Kmart and Sears is extremely compelling for our customers,
associates and shareholders as 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," Lambert said in a statement.
Shares of both Kmart and Sears have been bolstered by the value of their
real-estate holdings. Analysts have said Kmart shares may be worth about $150
based on real estate alone, while Sears' shares shot up more than 20 percent on
Nov. 11. on speculation of a real estate play after it was disclosed that
Vornado Realty Trust purchased a 4.3 percent stake in the company.
Ironically, as part of Kmart's ongoing conversion of its real estate holdings
into cash, it had a deal in place to sell 45 stores to Sears for about $525
million in cash. The sale was to have been finalized in April 2005.
In August, Kmart agreed to sell 15 stores to Home Depot for about $214 million
in cash.
Back in black
Almost overshadowed by the merger was Kmart's announcement that it had swung to
a third-quarter profit.
Minutes after disclosing the Sears deal, Kmart said it earned $553 million, or
$5.45 a diluted share, amid a reduction in store payroll and reductions in
newspaper advertising.
That represented the third-consecutive quarter of profits for the company,
putting it on pace to record it first profitable fiscal year since emerging from
bankruptcy.
Sales for the three months ended fell 13.7 percent to $4.4 billion and
same-store sales dropped 12.8 percent.
Kmart added it expects to end the year with over $3.1 billion in cash.
Sears, for its part, in October reported a third-quarter net loss of $61
million, or 29 cents a share. A year ago it made $147 million, or 52 cents a
share.
Those results didn't even come close to the lowered average estimate of analysts
polled by Thomson First Call of a profit of a penny per share.
Revenue dived 15.3 percent to $8.29 billion from $9.79 billion last year.
Analysts had expected $8.32 billion.
The biggest declines in sales showed up in Sears' traditional department stores,
which saw sales slump across all categories. Overall, domestic sales at stores
open longer than a year -- a key industry benchmark -- dropped 4 percent for the
quarter.
This story was supplied by CBSMarketWatch. For further information see
www.cbsmarketwatch.com.
For more information and to contact AFX: www.afxnews.com and www.afxpress.com
-0- Nov/17/2004 15:11 GMT
ahead in early trading Wednesday as investors embraced to merge Sears Roebuck &
Co. and Kmart Holding Corp. teaming up in a deal valued at $11 billion.
The merger of Troy, Mich.-based Kmart and Hoffman Estates, Ill.-based Sears
promises to shake up the U.S. retail industry.
Sears shares zipped ahead 21 percent, or 9.41, to $54.60 while Kmart's were up
16 percent, or $15.16, to $116.50.
Investors greeted word of the deal, with Sears' shares vaulting 18 percent to
$53.25 in pre-market trading while Kmart jumped 9.6 percent to $110.98.
The merger will give rise to a company named Sears Holdings Corp., which the
parties said will rank as the No. 3 U.S. retailer -- after Wal-Mart Stores Inc.
and Target Corp. -- with approximately $55 billion in annual revenue as well
as national footprint of nearly 3,500 retail stores.
"The move indicates there's going to be further consolidation in the retail
industry, and that should strengthen retailers going forward," said Peter
Cardillo, chief market analyst and strategist at S.W. Bach.
"I think, in general, this is good news for the group and obviously there's
value here and any time value is added to the equation it's positive," Cardillo
said.
UBS analyst Gary Balter, however, was more equivocal.
"In either a very bold or foolish move, Kmart announced that they are merging
with Sears effectively ending Part 1 of the Kmart story," said Balter in a note
to clients. "Whether putting together two struggling retailers will create
enough value and synergies to make a good retailer is a major question."
The Sears and Kmart businesses will continue to operate separately under their
respective brand names.
Terms and conditions
The merger, expected to close by the end of March 2005, is subject to
shareholder approval, regulatory clearance and customary closing conditions.
Terms of the definitive agreement call for Kmart stockholders to receive one
share of Sears Holdings common stock for each of their Kmart shares. In
addition, Sears's stockholders will have the right to elect payment of $50 in
cash or 0.5 shares of Sears Holdings for each Sears share.
Half a Sears Holdings share is valued at $50.61 based on Tuesday's $101.22
closing price for Kmart shares.
The deal represents a premium of more than 10 percent for Sears shareholders
based on Tuesday's closing price of $45.20.
On a prorated basis, 55 percent of outstanding Sears shares will be converted
into Sears Holdings shares and 45 percent will be converted into cash.
ESL Investments and its affiliates, controlled by Kmart chairman and major
shareholder Edward Lampert, have agreed to vote all Kmart and Sears shares they
own in favor of the merger.
Balter pointed out that Kmart's shareholders may not appreciate the merger.
"The hope in Kmart was that ESL would take a bold move with the cash and start
to invest in future growth opportunities," Balter said. "This is not the type of
move that we were looking for to create the next leg of value for Kmart
shareholders."
Sears Holdings will have its headquarters in Hoffman Estates, but Kmart will
maintain what the companies called "a significant presence" at its Troy offices.
Plans also call for Sears Holdings to sell off "non-strategic real-estate assets
as appropriate," the companies said.
In August, Kmart said it would layoff just over 200 employees from its
Troy-based headquarters staff.
Combining the two companies is "conservatively" estimated to generate $500
million of annualized cost and revenue synergies, which Kmart and Sears expect
to fully realize by the end of the third year after closing.
In particular, annual cost savings of more than $300 million are expected to be
realized via efficiencies of scale in merchandising, purchasing and
supply-chain, administrative and operational activities.
Moreover, the companies expect to realize some $200 million in incremental gross
margin via cross-selling opportunities and the conversion of many off-mall Kmart
stores to the Sears nameplate.
The merger, analyst Balter said, is seen as posing a potential threat to many
other retailers, particularly in the home-improvement channel -- and even mighty
Wal-Mart.
"This move effectively adds a new hardlines competitor in 1,300 stores
overnight, which is a negative primarily for the home-improvement retailers and
to the extent that the brands in Kmart drive traffic, Wal-Mart," he said.
Importance of real estate
Lampert will serve as chairman of Sears Holdings, while Alan Lacy, Sears'
chairman and chief executive, will become vice chairman and CEO. Aylwin Lewis,
currently president and CEO of Kmart, will be president of Sears Holdings and
CEO of Sears Retail.
The three executives will also make up an Office of the Chairman that Sears
Holdings will establish, supported by a 10-member board of directors. Seven
members of Kmart's board will sit on the Sears Holdings board, along with three
members of Sears' board.
"The combination of Kmart and Sears is extremely compelling for our customers,
associates and shareholders as 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," Lambert said in a statement.
Shares of both Kmart and Sears have been bolstered by the value of their
real-estate holdings. Analysts have said Kmart shares may be worth about $150
based on real estate alone, while Sears' shares shot up more than 20 percent on
Nov. 11. on speculation of a real estate play after it was disclosed that
Vornado Realty Trust purchased a 4.3 percent stake in the company.
Ironically, as part of Kmart's ongoing conversion of its real estate holdings
into cash, it had a deal in place to sell 45 stores to Sears for about $525
million in cash. The sale was to have been finalized in April 2005.
In August, Kmart agreed to sell 15 stores to Home Depot for about $214 million
in cash.
Back in black
Almost overshadowed by the merger was Kmart's announcement that it had swung to
a third-quarter profit.
Minutes after disclosing the Sears deal, Kmart said it earned $553 million, or
$5.45 a diluted share, amid a reduction in store payroll and reductions in
newspaper advertising.
That represented the third-consecutive quarter of profits for the company,
putting it on pace to record it first profitable fiscal year since emerging from
bankruptcy.
Sales for the three months ended fell 13.7 percent to $4.4 billion and
same-store sales dropped 12.8 percent.
Kmart added it expects to end the year with over $3.1 billion in cash.
Sears, for its part, in October reported a third-quarter net loss of $61
million, or 29 cents a share. A year ago it made $147 million, or 52 cents a
share.
Those results didn't even come close to the lowered average estimate of analysts
polled by Thomson First Call of a profit of a penny per share.
Revenue dived 15.3 percent to $8.29 billion from $9.79 billion last year.
Analysts had expected $8.32 billion.
The biggest declines in sales showed up in Sears' traditional department stores,
which saw sales slump across all categories. Overall, domestic sales at stores
open longer than a year -- a key industry benchmark -- dropped 4 percent for the
quarter.
This story was supplied by CBSMarketWatch. For further information see
www.cbsmarketwatch.com.
For more information and to contact AFX: www.afxnews.com and www.afxpress.com
-0- Nov/17/2004 15:11 GMT
