Federated Wins Price War

Federated Department Stores (FD Quote) finally struck a deal to acquire May Department Stores (MAY Quote) Sunday after weeks of negotiations that were almost abandoned due to disagreements over price.

In the end, May appears to have surrendered its bargaining position, allowing Federated to acquire it with cash and stock worth about $11 billion, creating a retail behemoth that will control 950 department stores in 49 states.

"I was skeptical, because I thought May was going to hold out for something that I just didn't think Federated would pay," said David Griffith, an analyst with Traditional Asiel Securities. "It looks pretty clear to me that the May board just caved in. Good for Federated for sticking to their guns -- they came out pretty well here."

Under the terms of the deal, each share of May will be converted into the right to receive $17.75 a share in cash and 0.3115 share of Federated stock, which adds up to around $35.50 a share, based on recent prices. That comes out to an overall equity value of $11 billion. Federated will also assume $6 billion in May debt.

Shares of May were recently down 65 cents, or 1.8%, to $34.70, while Federated was up 20 cents, or 0.3%, to $56.99.

The companies are similar in makeup. Federated, which owns Macy's and Bloomingdales, posted earnings of about $690 million on sales of $15.6 billion in the most recent 12 months, and had a market capitalization of about $9.6 billion on Friday. May, which owns Filene's and Lord & Taylor, earned about $512 million on sales of $14.4 billion and had a market cap of $10.3 billion.

May's higher market value stems from a recent run-up in the stock that began with the ousting of its former chairman and chief executive, Gene Kahn. He left abruptly in mid-January in a move that Wall Street viewed as an admission of failure, as sales trends had showed a continued deterioration in the company's competitive edge. Since Kahn's departure, shares of May had gained 28% by the closing bell on Friday.