Kmart buys Sears in $11B acquisition

By Anne D'Innocenzio
Associated Press

NEW YORK — A resurgent Kmart, home of the blue light special, is buying the once-dominant Sears department store chain in a surprising $11 billion gamble it is counting on to help both better compete with Wal-Mart and other big-box retailers.

Several hundred stand-alone Kmart stores could be transformed into Sears stores as part of the plan behind yesterday's $11 billion buyout. Kevork Djansezian • Associated Press

Kmart said it hasn't decided yet whether the acquisition would result in any of its stores in Hawai'i being converted into Sears stores.

"It's too early to tell what the local impact will be (in Hawai'i)," said Caryn Klebba, Kmart spokeswoman.

There are seven Kmart stores and six Sears stores in the Islands.

Earlier this year Sears bought 50 Kmart stores, including the Waikele Kmart in West O'ahu. Last month Sears said it would convert the Waikele Kmart to a new type of Sears, selling merchandise typical of a mall-based Sears mixed with convenience store and consumable items such as magazines, beauty aids, CDs, juice and frozen pizzas.

Lampert and Sears chairman and CEO Alan Lacy promised up to $500 million a year in savings within three years from store conversions, back-office job cuts, more efficient buying of goods and possible store closings.

Shares of both Kmart and Sears, Roebuck and Co. surged on the news, but some analysts are skeptical.

"Both have been broken in some sense," said Dan Hess, president and chief executive of Merchant Forecast, an independent research company. "Kmart has to learn to survive in a Wal-Mart world and Sears needs to learn to survive in a world of Home Depot and Lowe's."

Lampert, 42, was an assistant to Robert Rubin at Goldman Sachs & Co. before leaving to form a hedge fund at the age of 25. He orchestrated the deal and will lead a new board that will be dominated by Kmart directors.

"We need to have a very low cost structure in order to compete with our biggest competitors," said Lampert, whose Greenwich, Conn.-based investment firm controls Kmart and is Sears largest individual shareholder, with a 15.8 percent stake.

The merger allows Sears to move more quickly to where it believes its strongest base of customers are. "Off mall is where we need to move very aggressively," said Lacy, who will become vice chairman and chief executive of Sears Holding.

Lacy said he and Lampert have known each other for four years. The idea for a combined company first arose when they were in talks about Sears' purchase of 50 Kmart stores earlier this year, he said.

The new company is expected to have $55 billion in annual revenues and 3,500 outlets. That will mean it will trail only Wal-Mart Stores Inc. and Home Depot Inc. among the biggest U.S. retailers.

It will be headquartered in the Chicago suburb of Hoffman Estates, where Sears has its headquarters, but will maintain a "significant presence" in Troy, Mich., where Kmart is based.

The deal marks a remarkable comeback for Kmart, which filed for Chapter 11 bankruptcy protection in early 2002, leading to the closing of about 600 stores, termination of 57,000 Kmart employees and the cancellation of company stock.

Lampert gained control of Kmart when the retailer emerged from bankruptcy in May 2003 through the conversion of his debt holdings into equity. In March, Kmart posted its first profitable quarter in three years.

Kmart yesterday reported that it earned $553 million, or $5.45 per share, in the third quarter ended Oct. 27, compared with a loss of $23 million, or 26 cents per share, a year ago. Its stock price has risen more than sevenfold from $15 a share when it emerged from bankruptcy.

Sears' roots date to the late 1800s when it offered merchandise by mail order to farmers. It opened its first retail store in 1925 and eventually became the nation's biggest department store operator.

Mired in a retail slump, Sears had long fallen out of favor on Wall Street after losing ground to competitors and enduring sluggish sales for years. The company last fall introduced its Sears Grand stores, which offer grocery and convenience items besides traditional Sears fare such as clothing, home appliances and tools.

Lampert said that it is unlikely any Sears stores would be converted to Kmarts and that store closings are a possibility.

Sears shares soared $7.79, or 17 percent, to close at $52.99 Wednesday on the New York Stock Exchange and Kmart shares climbed $7.78, or 7.7 percent, to close at $109 on the Nasdaq Stock Market.

Under the agreement, which was unanimously approved by both companies' boards of directors, Kmart shareholders would receive one share of new Sears Holdings stock for each Kmart share. Sears shareholders can choose $50 in cash or half a share of Sears Holdings stock. That part of the deal values Sears shares at $11 billion, a 10.6 percent premium over its value at Tuesday's close.