In a move largely expected and supported by most analysts, Federated Department Stores ( FD) said it is looking into buying Target's ( TGT) Marshall Field's department store chain. Target had said last month that it was considering alternatives for both its 62-store Marshall Field's unit and its Mervyn's stores. Federated didn't release any additional details in its press release late Wednesday. Merrill Lynch analyst Stacy Turnof thinks the announcement is good for Cincinnati-based Federated because it will expand the company's reach into more states. Marshall Field's stores are located in eight states, she said, and Federated currently only has six stores in three of the states with the most Marshall Field's stores. "This will enable Federated to gain a foothold in areas where they have a minimum presence," Turnof said. She values the Marshall Field's chain at $1.8 billion to $2.2 billion, which is 8 to 10 times her full-year 2005 EBITDA estimate of $224 million for the chain. With the money Target receives for Marshall Field's, analysts expect the company to repurchase stock, buy back debt and invest in its core Target division. "Marshall Field's is a good march for
Federated ," said a buy-side analyst who covers Target and asked not to be named. "It fills a hole where they need it in the middle of the country, and they're their kind of stores," he said. Turnof added that "Federated will have the expertise to improve the operations of Marshall Field's business and grow it as a percentage of Federated's total sales." She expects that a post-transaction Marshall Field's would account for 18.5% of Federated's total sales in fiscal 2004. Shares of Target were lately up 64 cents, or 1.5%, at $43.50, while shares of Federated were down 5 cents, or 0.1%, at $52.41.
Analysts generally think May Department Stores ( MAY) could be another suitable buyer of the Marshall Field's locations. May also has a small presence -- about 15 stores -- in current Marshall Field's locations, Turnof noted. (Merrill Lynch does investment banking for Federated.) The buy-side analyst noted that a group of European-based department store chains could also be interested in the Marshall Field's chains to start a U.S. presence. "It's in Target's best interest to keep everybody interested," said the analyst, who suspects the deal with Federated could be close to completion because Federated announced it. But the buy-side analyst thinks Wall Street is most concerned about what will happen with Target's Mervyn's chain. "Will this be a spilt transaction?" he asked, wondering if Federated might choose to purchase some Marshall Field's and some Mervyn's stores, or if Target would require a purchase of some Mervyn's stores, which are perceived as a harder sell in part because of their discount-store layout. Mervyn's "asset value is worth more than the ongoing concern," he said. If Mervyn's keeps operating as a retailer, the operating results will have less value than adding up the value of the real estate via selling off leases and inventory. In that case, he said, Kohl's ( KSS) could be interested in the real estate. "It would make sense because they're competing against Mervyn's in California, and Mervyn's has a lot of stores in Texas," an area where Kohl's is currently trying to expand.