The speculation began in March when Target (NYSE:TGT) first tapped Goldman Sachs (NYSE:GS) to crunch a few numbers and analyze strategic alternatives for the struggling Marshall Field's and Mervyn's chains. Yesterday, it came to an end. All parties finally laid their cards on the table, and ultimately May Department Stores (NYSE:MAY) outbid rival Federated (NYSE:FD) with a $3.24 billion offer.
As part of the arrangement, May will acquire -- along with all 62 Marshall Field's locations -- three distribution centers, $600 million in credit card receivables, and the real estate from nine Mervyn's stores in the Minneapolis/St. Paul area.
May's victory over Federated raised a few eyebrows, as the latter was widely expected to add Marshall Field's to its Bloomingdale's and Macy's chains. What caught my attention, though, was the price tag.
While well regarded, the upscale Marshall Field's unit was only forecast to garner a slight premium to its $1.8 billion book value. Instead, the 80% premium implied in the price will net Target an after-tax gain of $1 billion, or roughly $1.00 per share. Ironically, May will be purchasing Marshall Field's from the same company (then known as Dayton Hudson) that it lost out to in a bidding war 14 years ago. The proceeds will primarily be used to fund a planned $3 billion stock repurchase agreement.
Analysts and shareholders alike have been pressuring Target for years to divest the underperforming Marshall Field's and Mervyn's chains. Management refused, opting instead to funnel the cash flow generated by these two units into the faster-growing namesake Target stores. However, earnings have retreated steadily of late. Last year's further deterioration -- operating income at Marshall Field's and Mervyn's plummeted 21.1% and 32.6% respectively, while Target's rose 12.3% -- finally prompted Target to overhaul Marshall Field's in preparation for a suitor.
With the new addition, May's portfolio will include 500 department stores operating under such names as Lord & Taylor, Filene's, and Foley's, as well as 217 David's Bridal locations. The purchase will expand May's presence in the Midwest, help gain pricing leverage with vendors, and put the firm on more even footing to battle archrival Federated in the upscale arena. In a press release, May said that economies of scale should deliver "pre-tax synergies" of $85 million in fiscal 2005 and up to $180 million annually going forward.
They may have overpaid, but winning Marshall Field's was vital to turning around May's stagnant top-line growth, which is lower now than it was in 1999. Bridal sales are a bright spot, but account for only a fraction of overall revenues. May is relying heavily on this move, as well as a massive upcoming campaign to remodel stores and re-brand its image to appeal to younger shoppers.
May gained a valuable name yesterday, but Target was the real winner. The company pocketed a $1 billion profit from a division that, if anything, was only slowing down growth. As fellow Fool Phil Wohl pointed out recently, Marshall Field's and Mervyn's combined represented only 13% of sales and 7% of pre-tax earnings last year. Unfortunately, Mervyn's doesn't appear to be quite so fetching. Target is reportedly struggling to find a buyer for the chain that is withering under competition from Kohl's (NYSE:KSS) and, of course, Wal-Mart (NYSE:WMT). Regardless, cutting loose these units will finally allow Target to drive with one foot on the accelerator without the other on the brake.
Can't seem to get enough of the up-and-down retail industry? Here's a sampling from our archives:
- Seth Jayson examines Kohl's hit-and-miss first quarter - Kohl's Rolls a Gutter Ball
- Seth sees if Federated's comps stack up - Firming Up at Federated
- Alyce Lomax reports a slowdown at May - Better Days for May?
Fool contributor Nathan Slaughter owns none of the companies mentioned.
