K-Mart and Sears to Merge in $11 Billion Deal

K-Mart is taking over Sears in a deal valued at around $11 billion. The announcement came as something of a surprise on Wednesday, and the market is still trying to figure out what it means. If anything, it means that Wal-Mart has set the retail agenda for the next decade or longer. And it may prove that Edward Lampert is the next Warren Buffett.

The deal would create the nations third largest retailer as measured by revenue after Wal-Mart and Target and by market capitalization after Wal-Mart and Home Depot. The key is that Wal-Mart is number one, and Sears and K-Mart as separate entities weren’t in a position to compete. Combined there are synergies, a largely misused Wall Street term that means the whole is bigger than its parts (but which usually means, the M&A department tossed in a few extra million to next year’s revenue projections and bugger if there’s a plausible reason for it). Streamlining and cross-selling may add $500 million to the books over the next three years – or maybe not.

Sears has already taken on the Wal-Mart approach to low prices in a warehouse with its Sears Grand brand of stores. K-Mart offers a chance to expand this concept, though not necessarily as Sears Grand. Both will offer goods by Land’s End , recently purchased by Sears, and Martha Stewart, whose stuff has been at K-Mart for ages and whose reputation is about to undergo major rehabilitation of post-Stalin proportions. Once merged, the plan is to build up brands by combining their homecare and fashion products.

The clever clumps behind the merger is Edward Lampert, ex-Goldman Sachs, worth about $2 billion. His hedge fund, ESL Investments, bought K-Mart while the latter was in bankruptcy for less than $1 billion a couple of years ago. He infused capital, got managers to boost sales and sold off some choice real estate. Now, K-Mart generates $4 billion in cash every year.

Mr. Lampert’s model is like Warren Buffett’s, grand old man of Berkshire Hathaway (a company so well-off that only big time investors can afford more than a few shares). The plan is to buy up an undervalued company, pare costs, get it to generate cash, and use the proceeds to move onto the next target. That means that there are losers in this arrangement – the same suppliers who’ve been squeezed by Wal-Mart and Target. The pips are about to squeak.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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