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Friedman Industries, Incorporated Message Board

  • bubble_go_bye_bye bubble_go_bye_bye Nov 17, 2004 2:32 PM Flag

    BONT mentioned as merger candidate

    By Peter Loftus

    PHILADELPHIA (Dow Jones)--More mergers and acquisitions lie may ahead in the retail industry, but investors shouldn't expect many on the scale of KMart Holding Corp.'s (KMRT) agreement Wednesday to acquire Sears Roebuck & Co. (S) for $11 billion.

    The presence of ailing companies in the retail sector is one factor that should continue to spur consolidation, said George Whalin, founder of Retail Management Consultants in San Marcos, Calif.

    "One of the things about retailing is there are always a few companies that are wounded and having difficulties," Whalin said. "This merger is essentially a merger of two wounded companies, it looks like to me."

    Whalin sees several trends that drove Kmart and Sears into each others' arms, which could lead to continued M&A activity elsewhere in the industry. The rise of discount giant Wal-Mart Stores Inc. (WMT) has forced other retails to find ways to cut costs to remain competitive. A merger can lower cost structures, if executed properly.

    Also, retail chains' ownership of prime real estate have made some companies more attractive to outside investors and rival retailers alike. Even before Wednesday's deal, Sears had agreed earlier in the year to acquire 50 stores from Kmart, which it planned to convert to Sears stores.

    Management issues also have played a role in recent retail mergers, Whalin said.

    "If you look at any of the mergers in retailing in the last few years, management has been unable to grow the business," he said.

    Other big recent retail deals include May Department Stores Co.'s (MAY) $3.2 billion acquisition of the Marshall Field's department-store chain from Target Corp. (TGT) in July. Also, Target sold its struggling Mervyn's discount chain in September to a private investor group for about $1.65 billion.

    Whalin said Mervyn's could become a future takeover target, but "it depends on whether the new management can make it work. They're still pretty badly wounded."

    Mervyn's spokesman Greg Terk declined to comment on takeover speculation, but said "we're concentrating on our business and how to become an independent company."

    At least one other deal could be imminent. Toys "R" Us Inc. (TOY) said in August it planned to explore a possible sale of its toy unit.

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    • Investors also have speculated that Dillard's Inc. (DDS) is a potential takeover target. The Little Rock, Ark., company, which operates department stores concentrated in the Southeast, has seen its sales decline and its profit margins squeezed.

      "There's always speculation about Dillard's, as one of the last remaining regional department store chains," said Dan Hess, chief executive of Merchant Forecast, an independent research firm focusing on mall-based retailers.

      A Dillard's spokeswoman couldn't immediately be reached.

      Potential buyers for department stores include giants May, which operates Filene's and Lord & Taylor; and Federated Department Stores Inc. (FD), which owns Macy's and Bloomingdale's. These companies have bought up several old family-owned department stores over the years.

      Other remaining independent department store chains include Bon-Ton Stores Inc. (BONT) and Belk Inc. (BLK.XX). "I would imagine it may not be long before either May or Federated also gobbled those up," said Amanda Nicholson, a retail management professor at Syracuse University.

      Officials from Bon-Ton and Belk couldn't immediately be reached.

      Nicholson sees shrinking profit margins as a big factor driving future industry consolidation.

      But potential buyers aren't necessarily rushing to do deals at any cost. Spiegel Inc. (SPGLQ) said this week it has taken its Eddie Bauer unit off the auction block because it failed to attract an acceptable bid. Spiegel is in bankruptcy-court protection; Eddie Bauer will probably emerge from bankruptcy as a separate company instead of being sold off, though Spiegel hasn't ruled out a sale.

      "It's very difficult" to make retail acquisitions, Whalin said. "It requires taking on lot of debt and retailers can't afford to have high debt ratios. Debt becomes a real detriment to the abilitiy to run a vialbe retail business."

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