Updated from 5:25 p.m. EDT

Target

(TGT) - Get Report

took a big step into the 21st century Wednesday, striking a deal to sell its long-underperforming Marshall Field's chain and setting a plan that could return most of the proceeds to shareholders through a stock buyback.

Target sold 62 stores, three distribution centers and $600 million in credit card receivables to

May Department Stores

(MAY)

for $3.2 billion. It simultaneously announced a plan to buy back up to $3 billion of stock over the next three years.

Target shares jumped $2.25, or 4.9%, to $47.88 in after-hours trading after closing the regular session down 57 cents, or 1.2%, at $45.63.

Target, which also sold nine Mervyns in Minnesota that it expects to close, will record a gain of about $1 billion, or $1 a share, on the May transaction. About 780 jobs will be lost in the Mervyn's deal.

May said in a release that it expects the deal to close in its second or third quarter of fiscal 2004. The company expects to realize pretax synergies of $85 million in fiscal 2005, $140 million in 2006, and $180 million per year thereafter. In addition, the acquisition is expected to be accretive to per-share earnings in fiscal 2005 and beyond.

Target announced plans to explore alternatives for Marshall Field's and Mervyn's in March. Analysts put the book value of the units at about $1.8 billion each.

"We believe that the sale of Marshall Field's to The May Department Store Company as an ongoing business enhances the opportunity for all of our stakeholders to enjoy continued success for many years," Target said in a statement.

The review of strategic alternatives for Mervyn's is continuing in line with Target's timetable, and additional information should be available in 60 to 90 days, the company said.

Shares of May were falling 13 cents, or 0.5%, at $28.75 in Wednesday after-hours trading after closing the regular session down 29 cents, or 1%, at $28.88.

"Among the benefits we see is that this combination will produce excellent economies of scale, improved buying power, and an expanded distribution network," May said in a statement.

May said it will retain the Marshall Field's nameplate and operate it as a standalone department store divisions under the May umbrella. Linda L. Ahlers will remain as president of Marshall Field's, and the Marshall Field's headquarters will remain in Minneapolis.

May also operates Lord & Taylor and Filene's, among other department stores.

Meanwhile, May's main rival

Federated Department Stores

had announced in April that it was interested in buying the Marshall Field's chain, a move most analysts had applauded. The shares weren't seeing appreciable volume after hours.