Federated & May Announce $17B Merger

Cincinnati, New York & St. Louis, February 28--Federated Department Stores and May Department Stores today announced that they have entered into a merger agreement. The companies said that each share of May will be converted into the right to receive $17.75 per share of cash and 0.3115 shares of Federated stock. Based on the 10-day trading average of Federated stock as of Friday, February 25, 2005, this equates to a value per share of $35.50, or $11 billion in total equity value. In addition, Federated will assume May debt that was approximately $6 billion at year-end, for a total consideration of approximately $17 billion. As part of this transaction, Federated has committed to increase its annual dividend to $1 per share. The deal, which was approved by the boards of directors of both companies yesterday, will establish Federated as a $30 billion national retailer whose economies of scale and scope of operations - stores in 49 states, Guam, Puerto Rico and the District of Columbia - will enable it to compete more effectively in the highly competitive retail sector. "This is truly an exciting day in American retailing," said Terry J. Lundgren, Federated's chairman, president and chief executive officer. "Today, we have taken the first step toward combining two of the best department store companies in America, creating a new retail company with truly national scope and presence." Once consummated, Federated will operate more than 950 department stores, along with approximately 700 bridal and formalwear stores. In addition, 15 new states, mostly in the nation's heartland, will be layered onto Federated's existing 34-state operating base, with relatively little overlap between the companies' locations. As a result, Federated for the first time will have a truly national retail footprint, with stores in 64 of the nation's top 65 markets. Lundgren said that this transaction is expected to be accretive to Federated's earnings per share in 2007. Federated expects to realize approximately $450 million in cost synergies by 2007, resulting from the consolidation of central functions, division integrations and the adoption of best practices across the combined company. Federated said that while it intends to merge May's St. Louis corporate headquarters functions into its own Cincinnati and New York corporate offices, beginning this year, its intention is to make St. Louis the headquarters of one of the major operating divisions going forward. While no division consolidations or store name changes are planned before 2006, Federated said it is likely that most of May's regional department stores ultimately will be converted to Macy's. "We have had considerable success in re-branding our own regional stores as Macy's, so obviously we anticipate continuing this strategy to some extent with our new stores," Lundgren said. "Operating regional stores primarily under one brand means we can advertise nationally, unlike regional retailers, which is more cost-effective. It also means that cause-marketing programs such as Macy's 'Go Red for Women' campaign, which benefits the American Heart Association, can be promoted nationally, making them more impactful for the causes they benefit." Among the benefits to customers arising from the acquisition, Lundgren cited the capacity to lower costs through synergies; the ability to engage in national marketing initiatives; the potential to expand the private brand merchandise lines of both companies; a rollout of Federated's successful reinvent initiatives to May's department stores; and the ability to expand customer loyalty programs. Lundgren said the combination of these two companies is expected to lead to accelerated same-store sales growth. "It will take us until mid-2007 to implement all of the changes we would anticipate as a result of this acquisition."

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