Retail Goes Shopping

Mergers and acquisitions went AWOL in 2002, but they'll make a comeback this year, say some buyout pros. One sector teeming with takeover bait: retail. "Companies that have been hammered need to get bigger," says Gilbert Harrison, chairman of Financo, an M&A boutique specializing in retail and merchandising deals. For department stores, consolidation is "absolutely necessary" to ensure growth, he argues, and stores will look to acquire over-leveraged rivals at bargain prices. So stores with big debt and high expense ratios are targets, says Harrison.

Among the majors, Federated Department Stores (FD ), with 468 outlets including Macy's and Bloomingdale's, is rumored to be interested in merging with May Department Stores (MAY ), with 437 stores including Lord & Taylor and Robinsons-May. Both are trading at or close to their lows and face flat sales and earnings in 2003 and 2004. Harrison declined to comment on Federated and May but says he is busy with several retail deals. Federated and May declined to comment.

On the prowl: Wal-Mart Stores (WMT ), J.C. Penney (JCP ), and Neiman Marcus (NME ). Possible partners: Kohl's (KSS ), Gap (GPS ), and Coach (COH )--says one investment banker. Christine Augustine of Bear Stearns sees department stores losing ground to smaller, more entrepreneurial retailers, such as Kohl's. She also sees "another wave of industry consolidation" as the majors try to cherry-pick them. The survivors among the department stores, says Augustine, will be those with the resources to pursue acquisitions.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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