business news in context, analysis with attitude

Additional information has emerged about the $11 billion merger of Kmart Holding Corp. and Sears. The cash-and-stock deal, which will create the nation’s third-largest retailer (after Wal-Mart and Home Depot), is expected to close next March.

To read MNB’s coverage of the merger announcement, go to:

New details include:

  • While the merger will create a retail entity with more than 3,400 stores and annual sales of $55 billion in annual revenue, it is expected that a number of units eventually will be closed, and that some Kmart units will be converted to the Sears banner, and vice-versa.

  • These closing and conversions, as well as back-office job cuts and more efficient buying of goods, are expected to generate $500 million a year in savings within three years.

  • Analysts are speculating that the combination of the two cultures will lead Kmart in a Target-like direction, trying to move slightly upscale from both its own current position and from the market position occupied by Wal-Mart.

  • Kmart chairman Edward S. Lampert, who will become chairman of the new Sears Holding Co. that will be the parent company once the deal is finalized, reportedly orchestrated the merger – his investment firm controls Kmart and is the largest single investor in Sears.

  • The deal is believed to be a good way to allow Sears to get away from the malls where it traditionally has operated stores; such a move is believed by Sears management as the best way to improve its flagging fortunes.

  • The new Sears Holding Co. will be headquartered in the northwestern Chicago suburb of Hoffman Estates, where Sears currently has its headquarters, but will maintain what the company has termed a “significant presence” in Troy, Mich., where Kmart is based.

    During the past month or so, Kmart has been conducting a very public bidding war between Michigan and Georgia, as it threatened to move its headquarters for a better financial deal. Local officials in Michigan have called Kmart’s various negotiations “disingenuous,” and said they expect a “bloodletting” at Kmart’s headquarters.

  • The Wall Street Journal reports this morning that Kmart’s new CEO, Aylwin Lewis, who was hired just last month to away from fast food chain Yum! Brands to run the company, had no idea when he was hired that the Kmart-Sears merger was in the works, and only found out two weeks ago.

  • The Seattle Times reports that Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting company and investment banking firm in New York, notes that Kmart’s Lampert “did not put one penny back into the stores and he built a ton of cash. He's not fooling around trying to fix Kmart with Kmart's money." Instead, he says, Lampert took that money and bought Sears. And Davidowitz predicts Lampert will now do at Sears what he did at Kmart — cut costs by selling stores, reducing selection and slashing labor costs.

    "My prediction is in six or seven years there will not be a Kmart or a Sears," Davidowitz says. "That's why Target and Wal-Mart are partying. They're going to chomp right into them. Wal-Mart is a retail company, not a hedge fund. Home Depot is a retail company, not a hedge fund. Target is a retail company, not a hedge fund.” And Sears/Kmart, he believes, is a hedge fund, not a retailer.

  • Before the merger was announced, USA Today reported that Sears was looking to develop a more multicultural approach, carrying new brands in a number of test stores that could expand its appeal to African-American, Hispanic and Asian customers.

  • Ironically, on the same day that the merger was announced, Kmart said that it earned $553 million in the third quarter, compared with a loss of $23 million for the same period a year ago.

    The better earnings were attributed by the company to the sale of stores to both Sears and Home Depot, as well as a reduced number of sales promotions that resulted in higher margins.

    But while Kmart clearly has reversed its profitability picture for the short-term, there doesn’t seem to be any restored customer appeal. Sales for the quarter were down 13.7 percent to $4.4 billion compared with $5.1 billion a year ago, and same-store sales for the quarter were off 12.8 percent.

KC's View:
As might be expected, we got a ton of email yesterday about this story…much of which can be read below in “Your Views.” And we’ll save our opinion of this story for below as well…