In a stunning move that could forever alter one of Chicago's most enduring business icons, Kmart Holding Corp. pounced on Sears, Roebuck and Co. today in a $11 billion merger.
The new Sears Holdings Corp. will become the nation's third-largest retailer and will continue to occupy Sears headquarters in suburban Hoffman Estates.
But it will be controlled by Kmart's chairman, Edward S. Lampert, a 42-year-old Connecticut investor, who made his name buying Kmart out of bankruptcy.
Lampert raised almost $1 billion in a matter of months selling many Kmart stores to other retailers, including Sears. His ESL Investments owns a majority of Kmart shares and 15 percent of Sears' stock.
In a press conference today, Lampert and Sears Chairman Alan J. Lacy said the idea behind this merger is to build up the new company, not tear it down. The new management team will try to forge a single, lower-cost competitor, while keeping Sears and Kmart as separate chains.
Still, the new company likely will sell off some stores and cut redundant operations.
"This is going to be an enormous undertaking," Lampert said. "We'll need the best of the Kmart team and the best of the Sears team."
The new Sears will have about $55 billion in sales and Lampert and Lacy hope that will give it enough girth to take on robust industry giants like Wal-Mart Stores and The Home Depot Inc., which are both still bigger than the combined Sears-Kmart operation.
The move will push Kenmore appliances, Craftsman tools and DieHard batteries into Kmart's 1,500 discount outlets. It will help Sears spruce up its 850 department stores with Kmart's wildly popular Martha Stewart line of linens, towels and paints.
While Sears Holdings will be based in Hoffman Estates, Kmart chairman Lampert takes the chairman's job. Sears CEO Lacy will become vice chairman and CEO of the new holding company, but the new board of directors will have seven members from the Kmart board and only three from Sears.
Aylwin B. Lewis, Kmart's chief executive, will be the CEO of both the Sears and Kmart divisions of the new holding company, and Kmart will maintain a "significant presence" at its present headquarters in Troy, Mich.
Lacy said the merger will boost both companies by "accelerating the Sears off-mall growth strategy and enhancing the brand portfolio of both companies." Sears has been adding stand-alone stores with a product mix closer to Kmart; the Sears Grand store in Gurnee was one of the first.
The combined company will have 3,500 stores, but some likely will be sold.
"We have to consider other alternatives" for underperforming stores, Lampert told analysts today. "I think we'll probably end up over time opening more stores than we close, but obviously if we don't operate the stores well, it might be the other way around."
A joint statement from Kmart and Sears said the combined company will review its stores "to monetize non-strategic real estate assets" a strategy that could include dealing stores to competitors.
Lampert predicted the combined company will save $500 million within three years by squeezing costs out of its supply chain. "We need to have a very low cost structure in order to compete with our biggest competitors,'' he said.
Kmart shares jumped 8 percent on the Nasdaq stock market, shooting as high as $119.69 before closing at $109.
The merger swaps Kmart shares one-for-one with the new Sears Holdings shares, while Sears stockholders will get either $50 a share or one share of the new company for every two Sears shares they now hold.
The merger, expected to close by the end of March, is subject to approval by regulators, as well as by Kmart and Sears shareholders.
Kmart filed for Chapter 11 bankruptcy protection in early 2002, leading to the closing of about 600 stores, termination of 57,000 Kmart employees and cancellation of company stock. The retailer emerged from bankruptcy in May 2003 and in March posted its first profitable quarter in three years.
Kmart, in recent years, has been shedding many of its underperforming stores, a strategy that has helped the once-struggling discount retailer bounce back after it emerged from bankruptcy. Kmart recently agreed to sell 50 stores to Sears for $575 million as part of that strategy.
A slumping icon
Speculation that Lampert was pushing to make a move on Sears had been growing for months as his investment stake grew and Sears' retailing picture continued to sour.
The company, founded in 1886, is an American icon. It has $9.5 billion in market value, $31 billion in 2003 merchandise sales and $2.7 billion in cash on hand.
Sears' heyday was the 1960s when it ruled shopping malls, selling everything from kitchen stoves to kids' apparel and power tools to a rapidly growing middle class. The Sears credit card gave many young families their first access to revolving credit. Its Allstate insurance unit, later spun off, insured their homes and autos.
Sears stock has generated a total return of 59 percent over the last 10 years, far less than Wal-Mart's 362 percent total return.
Sears' stock hit a 10-year low of about $24 a share in the fall of 2002 after new problems with its credit card portfolio arose. The stock rebounded 23 percent to about $46 earlier this month after a real estate trust bought a stake in the company. The stock closed Tuesday at $45.20, down $1.10, or about 2.4%.
On Nov. 5, when Vornado Realty Trust revealed that it had quietly amassed control of 4.3 percent of the company's stock, it highlighted a fundamental shift in the way the market values retailers. The move put heavy pressure on Lacy to justify the company's weak profits and outmoded merchandizing strategies.
Store locations coveted
According to interviews with retail and real estate experts, opportunistic investors like Vornado Chairman Steven Roth and Lampert might be able to make more money by selling many of Sears' poorly performing but well-located stores to more successful retailers. And Sears itself might be more viable as a smaller chain with a tighter focus.
Lacy's inability to turn Sears around after four years of trying has run smack into a powerful real estate trend that has created heavy demand for just the kinds of properties that Sears has in abundance.
That's why Sears' stock soared 23 percent after the Vornado announcement Nov. 5 and another 5 percent last Thursday when Robert Ulrich, chairman of Target Corp., told analysts his company is open to the idea of buying prime mall-based properties.
Over the last few years, new mall construction has slowed to a crawl, about 1 percent growth annually versus 5 percent a year in the 1980s. Growing retailers like Target and Nordstrom Inc. can't find enough space for new stores, especially in urban and suburban markets where property is at a premium.
Pressure started building on Lacy in 2002 when Lampert, the 42-year-old chairman of Connecticut hedge fund ESL Investments, began collecting a 15 percent stake in the retailer.
Lampert had proven already how hot the market is for recycled retail real estate by selling more than $1 billion worth of assets at Kmart.
Sears, Roebuck has more than 141 million square feet of retail space, according to its annual report. It owns almost 60 percent of its 871 full-line stores, which are primarily located in large shopping centers. Those stores alone total 128 million square feet. Sears also has 345 specialty stores, including 245 hardware stores and 18 focused on home decorating and remodeling.
But the real estate Sears owns is uniquely valuable in several respects. First, analysts say, many of its stores are in prime locations that have become congested over the years. The sites are often next to desirable corners and have special features like big parking lots with easy access from the street. They are also big enough to split.
Lampert has been highly active in all aspects of the Kmart investment, from dealmaking to fixing the stores.
"In a control position," Lampert told BusinessWeek magazine recently, "our ability to create value goes up exponentially."