NEW YORK (CNN/Money) - Sears Roebuck & Co. and Kmart are merging in an $11 billion stock deal, the companies announced Wednesday, combining two major retailers that have both lost ground in competition with discount retailers in recent years.
Consumers may not see an immediate impact, but one retail analyst said he's confident the combined companies will not hang onto all 3,500 stores they own between them.
"Kmart never had appliances and had no reputation for service," said analyst Kurt Barnard. "That's an honor that belongs to Sears. And Kmart has reputation for low prices, which Sears never has had."
But he said that even the combined company will face a challenge in competing with the more successful brands now in the market.
Sears shares rose nearly 9 percent in before-hours trading on Inet, while Kmart was down 6.8 percent, according to Reuters.
The new company will be known as Sears Holdings and be based at Sears current headquarters in suburban Chicago. But both names will continue to be used on stores.
The company said it will continue to operate with both brand names but that some Kmart stores will shift to Sears locations as Sears continues to move away from mall locations.
And the companies say they're looking at $300 million in cost savings a year by the end of the third year after the merger. They also expect $200 million in improved annual profits from cross-promotion between the two companies.
They said cost savings should allow increased in earnings per share the first year after a special charge for merger-related costs. The deal is expected to close by March 2005.
While the deal is advertised as a merger of equals, details suggest it is tilted slightly towards a Kmart purchase of Sears.
Sears shareholders will be able to chose between $50 in cash or 0.5 share of Sears Holdings, which the companies said would be valued at $50.61, while Kmart shareholders would get one share of Sears Holding for each of their shares, which closed Tuesday at $101.22.
That means the deal provide about a 10.6 to 12 percent premium for Sears (Research) shareholders, while Kmart (Research) shareholders will see either no premium or a slight decline, if the shares are valued based on the cash offer to Sears shareholders.
Edward Lampert, chairman of Kmart who owns 52.6 percent of the company's shares according to its latest proxy, will be chairman of the new combined companies. Lambert also owns about 14 percent of Sears.
Sears Chairman and CEO Alan Lacy will serve with Lambert and Kmart's current CEO Aylwin Lewis in the company's office of the chairman. Lewis, not Lacy, will be president of Sears Holdings and CEO of Sears Retail.
Kmart was forced to file for bankruptcy court protection in January 2002, but it has seen its stock soar since emerging from bankruptcy in May 2003. The stock gain has been seen as driven by the value of its real estate rather than its retail operations.
Sears saw its shares lost about 28 percent of its value from October 2003 through Nov. 4 this year. The next day shares lept 23 percent on news that real estate investment firm Vornado Realty Trust had bought 7.9 million shares, or about a 4.3 percent stake in Sears.
"This certainly came as a total surprise, but maybe it shouldn't have," said Barnard. "I think we're looking at a real estate deal here."
Barnard points out that Sears has been buying stores from Kmart as it tried to move away from mall locations.
He said he thinks the combined companies will definitely shed more stores going forward and could help them with competition with discounters such as Wal-Mart Stores (Research), the world's largest retailer,Home Depot (Research), the No. 2 retailer and leading home improvement retailer, and Target (Research), which will lose its place as the No. 3 retailer to the combined Sears Holding.
Consumers may not see an immediate impact, but one retail analyst said he's confident the combined companies will not hang onto all 3,500 stores they own between them.
"Kmart never had appliances and had no reputation for service," said analyst Kurt Barnard. "That's an honor that belongs to Sears. And Kmart has reputation for low prices, which Sears never has had."
But he said that even the combined company will face a challenge in competing with the more successful brands now in the market.
Sears shares rose nearly 9 percent in before-hours trading on Inet, while Kmart was down 6.8 percent, according to Reuters.
The new company will be known as Sears Holdings and be based at Sears current headquarters in suburban Chicago. But both names will continue to be used on stores.
The company said it will continue to operate with both brand names but that some Kmart stores will shift to Sears locations as Sears continues to move away from mall locations.
And the companies say they're looking at $300 million in cost savings a year by the end of the third year after the merger. They also expect $200 million in improved annual profits from cross-promotion between the two companies.
They said cost savings should allow increased in earnings per share the first year after a special charge for merger-related costs. The deal is expected to close by March 2005.
While the deal is advertised as a merger of equals, details suggest it is tilted slightly towards a Kmart purchase of Sears.
Sears shareholders will be able to chose between $50 in cash or 0.5 share of Sears Holdings, which the companies said would be valued at $50.61, while Kmart shareholders would get one share of Sears Holding for each of their shares, which closed Tuesday at $101.22.
That means the deal provide about a 10.6 to 12 percent premium for Sears (Research) shareholders, while Kmart (Research) shareholders will see either no premium or a slight decline, if the shares are valued based on the cash offer to Sears shareholders.
Edward Lampert, chairman of Kmart who owns 52.6 percent of the company's shares according to its latest proxy, will be chairman of the new combined companies. Lambert also owns about 14 percent of Sears.
Sears Chairman and CEO Alan Lacy will serve with Lambert and Kmart's current CEO Aylwin Lewis in the company's office of the chairman. Lewis, not Lacy, will be president of Sears Holdings and CEO of Sears Retail.
Kmart was forced to file for bankruptcy court protection in January 2002, but it has seen its stock soar since emerging from bankruptcy in May 2003. The stock gain has been seen as driven by the value of its real estate rather than its retail operations.
Sears saw its shares lost about 28 percent of its value from October 2003 through Nov. 4 this year. The next day shares lept 23 percent on news that real estate investment firm Vornado Realty Trust had bought 7.9 million shares, or about a 4.3 percent stake in Sears.
"This certainly came as a total surprise, but maybe it shouldn't have," said Barnard. "I think we're looking at a real estate deal here."
Barnard points out that Sears has been buying stores from Kmart as it tried to move away from mall locations.
He said he thinks the combined companies will definitely shed more stores going forward and could help them with competition with discounters such as Wal-Mart Stores (Research), the world's largest retailer,Home Depot (Research), the No. 2 retailer and leading home improvement retailer, and Target (Research), which will lose its place as the No. 3 retailer to the combined Sears Holding.
Alexanders, Caldor's all went to the store graveyard...
