TOPICS > Economy

Kmart and Sears Announce Merger That Will Create Third Largest Retailer

November 17, 2004 at 12:00 AM EDT

RAY SUAREZ: The $11 billion deal between Sears and Kmart brings together two of the oldest and, more recently, two of the more troubled retailers in America.

The new company will now be the country’s third largest retailer behind Wal-Mart and Target and have an expected annual revenue of $55 billion from nearly 3,500 stores.

To understand what’s behind the merger and what might lie ahead, I’m joined by Christine Augustine, a retail analyst at Bear Stearns. For the record, Bear Stearns has no financial relationship with Sears and K-Mart. It has a non-investing relationship with Wal-Mart and target.

So, Christine, what’s the attraction for both parties to the deal? What does each get that the other one might have?

CHRISTINE AUGUSTINE: Well, I think what they get combined is an interesting real estate strategy, a lot of off- the-mall stores which Kmart operates in convenient locations in places where there’s a lot of people, and an assortment of brands, both from what Kmart runs now through their stores and also some of the big brands that Sears owns.

Kenmore is one of their biggest brands. It’s very well known, number-one appliance brand in the United States. So it seems to me that they’re looking to combine the best of each retailer into a format that’s on a combined basis stronger than, you know, each one separately.

RAY SUAREZ: So when you say getting those off-the-mall locations that Kmart has, it’s already closed 600 stores in its recent reorganization.

Does this mean a lot of other Kmarts will be disappearing and becoming Sears or getting sold to another place altogether?

CHRISTINE AUGUSTINE: We think that ultimately there could be somewhere between a thousand and twelve hundred stores off the mall, which would be former Kmarts that have turned into Sears.

RAY SUAREZ: And just over two years ago, we should remind people, Kmart was going into chapter 11. It was being critiqued as having a tired product lineup, no definable market niche. The stores looked bad and were badly situated.

Now 30 months later, they’re taking over one of the most venerable names in retailing. How did they pull that off?

CHRISTINE AUGUSTINE: Well, I think one of the ways in which they pulled it off was they had a common… they had some common ownership.

One investor in particular, Edward Lampert, who owns a large stake in Kmart and also owns a relatively large stake in Sears, and I believe that he’s viewed to be a very savvy investor and he saw that there was some value in Sears that could be unlocked if the format could be reconfigured and moved to more convenient locations off the mall.

RAY SUAREZ: Earlier today when Sears’ chief executive spoke to reporters, he noted that the chain has the same number of stores as it had 30 years ago and needs to grow to compete.

So is this a simple way of growing, becoming part of an already going concern and just turning them into Sears?

CHRISTINE AUGUSTINE: Well, it seems to me that this… this is going to be a risky way to grow. There are so many decisions to be made: Which stores, what are the brands, what are the right number of, you know, managers, what is the… what do the systems look like?

There are so many places where there’s execution risk. I think it will be extremely challenging to reconfigure these stores and create a presence for Sears off the mall.

RAY SUAREZ: But for both of them, was getting bigger, becoming part of a bigger company, the only way to survive?

CHRISTINE AUGUSTINE: In my opinion, yes. It’s becoming part of a bigger company, having the scale advantage, which would allow them to perhaps negotiate better prices from their suppliers, would allow them perhaps to compete more effectively with some of the large discounters like Wal-Mart and Target.

RAY SUAREZ: A lot of attention has been focused on Eddie Lampert, who is the head of Kmart, and brought it back from the brink.

He’s much admired as a turnaround artist and a successful investor. Does that give some luster to the deal that analysts might not find otherwise?

CHRISTINE AUGUSTINE: I think so. I think he is viewed to be very savvy. And there is certainly a halo effect on certain stocks when he becomes involved with them because he has a proven track record of unlocking value where others may not see it right away.

RAY SUAREZ: And some attention has also gone to Vornado, a large realty holding company that recently bought into Sears. Did that… did that sort of get people thinking that maybe there was a lot to the real estate aspect of this deal?

CHRISTINE AUGUSTINE: I think it certainly raised the level of awareness about retail real estate. I mean, it sort of follows along the lines of what we’ve seen with housing prices.

There has been a lot of appreciation for consumers in their own homes, and there seems to be an equivalent type of interest now in retailers’ real estate and whether or not there’s value that can be unlocked by selling properties or, you know, reconfiguring them to something different from a regional mall, maybe to a power strip center where you would have the option of having many more retailers that would want to be in that location.

RAY SUAREZ: Christine Augustine of Bear Stearns, thanks for being with us.