Kmart and Sears merge to form third-largest retailer
November 17, 2004,
TROY , Mich. — It's been the subject of speculation for more than a year, and today it became official. Kmart and Sears, Roebuck & Co. announced they will merge to create a new company — Sears Holding Corporation — that will be the nation's third-largest retailer with $55 billion in annual revenues.
The new company's chairman will be Edward Lampert, Kmart's majority shareholder and chairman of Kmart. He also holds a substantial stake in Sears. Current Sears Chairman and CEO Alan Lacy will become vice chairman and CEO of Sears Holding Corporation. Recently appointed Kmart President and CEO Aylwin Lewis will become executive vice president and chief financial officer.
William Crowley, currently senior vice president - finance of Kmart and a Kmart Board member will be executive vice president, finance and integration of Sears Holdings.
Lampert, Lacy, and Lewis will join a 10-member Sears Holdings board of directors, which will include a total of seven members from the current Kmart board and three members of the current Sears, Roebuck board. Sears Holdings will act as the holding company for the Sears and Kmart businesses, which will continue to operate separately under their respective brand names and will continue to be headquartered in Hoffman States , Ill. , and Troy , Mich. , respectively.
The merger was unanimously approved by the boards of both retail companies. In addition, Lampert's ESL Investments and its affiliates have agreed to vote all Kmart and Sears, Roebuck shares they own in favor of the merger and to elect stock in the transaction with respect to their shares of Sears, Roebuck.
Under the terms of the agreement, Kmart shareholders will receive one share of new Sears Holdings common stock for each Kmart share. Sears, Roebuck shareholders will have the right to elect $50.00 in cash or 0.5 shares of Sears Holdings (valued at $50.61 based on yesterday's closing price of Kmart shares) for each Sears, Roebuck share. Shareholder elections will be prorated to ensure that in the aggregate 55 percent of Sears, Roebuck shares will be converted into Sears Holdings shares and 45 percent of Sears, Roebuck shares will be converted into cash.
The current value of the transaction to Sears, Roebuck shareholders is approximately $11 billion. The transaction is expected to be tax-free to Kmart shareholders and tax-free to Sears, Roebuck shareholders to the extent they receive stock.
Lampert said, "The combination of Kmart and Sears is extremely compelling for our customers, associates and shareholders as it will create a powerful leader in the retail industry, with greatly expanded points of distribution, leading proprietary home and apparel brands and significant opportunities for improved scale and operating efficiencies. The merger will enable us to manage the businesses of Sears and Kmart to produce a higher return than either company could achieve on its own."
The merger is expected to close by then end of March 2005. The combination of the two companies is "conservatively "estimated to generate $500 million of annualized cost and revenue savings to be fully realized by the end of the third year after closing, according to a release by Kmart.
The transaction is expected to be "significantly" accretive to earnings per share in the first year before one-time restructuring costs. In addition, the companies expect to realize approximately $200 million in incremental gross margin from revenue synergies by capitalizing on cross-selling opportunities between Kmart and Sears' proprietary brands and by converting a substantial number of off-mall Kmart stores to the Sears nameplate in addition to the 50 Kmart stores Sears acquired earlier this year.
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