Big retailers seen near $10.4b merger

Page 2 of 2 -- The acquisition of May by Federated would give the latter more buying power with vendors, while combining operations would bring greater operating efficiencies, analysts and consultants said. The deal is also likely to save on administrative and advertising costs, they said.

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''You can't be a weak player today," said Jerry Socol, a Boston-area retail consultant who was chief executive of Filene's during the 1980s. ''It's survival of the fittest."

Sources, who spoke on condition of anonymity because the deal has not yet been announced, said the companies' boards approved an agreement over the weekend after days of often contentious negotiations over how much Federated would pay for May, according to The Washington Post. Sources said the two sides agreed Federated would pay $35 to $36 for each May share, in a mixture of Federated stock and cash. May shares, which had been rising on reports of a possible acquisition, closed at $35.35 Friday.

Federated's chief executive, Terry J. Lundgren, is expected to lead the combined company. The two companies discussed merging in the past, but talks broke down over several issues, including who would serve as chief executive. That issue disappeared in January, when May ousted chairman and chief executive Eugene S. Kahn.

The $10.4 billion price suggests May was a willing seller, Bill Dreher, a retail analyst at Deutsche Bank Securities Inc., told the Post. Over the next three years, he said, the merger will generate $400 million to $500 million in cost savings for the two companies through the elimination of overlapping departments such as marketing and distribution.

Retail analysts also expect Federated to cut administrative positions across May's divisions to reduce costs. ''You wouldn't need two buyers to deal with Ralph Lauren," David E. Griffith, an analyst at Tradition Asiel Securities Inc., told the Post.

Federated, which struggled in the late 1980s after becoming the target of a debt-financed takeover, has emerged as a retail powerhouse over the past five years.

Lundgren is widely credited with the chain's success. Since his appointment in 2003, he has expanded the chain's move into high fashion and introduced customer-friendly touches like self-service scanners and prominent signs to speed up shopping.

May has struggled to keep pace, falling behind Federated in developing in-house apparel brands and sprucing up its stores.

''May focused on profit, and Federated focused on fashion. And Federated won," Dreher said.

For 2004, Federated's same-store sales, a crucial measure of a retailer's health, grew 2.6 percent, compared with a 2.4 percent drop at May.

Analysts predict Federated will replace May's private-label clothing lines, sold under names such as Ideology and IE, with those from Federated. Federated's private labels, INC and Charter Club, have become bestsellers and respected names in fashion.

Federated has made no secret of its desire to operate a national department store chain under the Macy's name, arguing the brand -- captured in films like ''Miracle on 34th Street" and promoted in events like the annual Macy's Thanksgiving Day Parade -- is more prestigious than those of its regional department store chains.

Chris Reidy can be reached at reidy@globe.com. Material from Globe wire services was used in this report.