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Target ends an era with sale of Mervyn's

Minneapolis — Target Corp. closed out its "Power of One" chapter late last week, announcing the sale of its Mervyn's chain to an investment consortium and completing the sale of Marshall Field's to May Co.

Wall Street had urged the company to shed the mostly unprofitable divisions for years. And for years Target refused to do so, arguing that the merchandising and fashion-forward points of view from the more up-market divisions favorably benefited merchandising in its Target discount store operation. In addition, Target Corp. was able to tap the top-line cash flow from the department store and mid-tier divisions to help fuel the expansion of the company's real profit generator, Target Stores.

Wall Street reacted to the news, which broke early in the evening on Thursday, July 29, ambivalently. While some analysts suggested the deal would free Target for accelerated expansion, others argued that financials, cleared of other divisions, would demonstrate that the discounter's sales growth has slowed tremendously.

Speculation also turned to what Target will do with the cash. Since Target put the divisions on the block two months ago, it has said it will put the money toward a $3 billion stock buyback and reducing debt levels. Some speculate the company may seek an acquisition.

The Mervyn's sale will be transacted for approximately $1.65 billion in cash. The San Francisco Bay-area chain operates 257 stores in 13 states, primarily in the West and South. Last year, the mid-market nameplate generated $3.6 billion in sales and $160 million in pre-tax profit.

The investment consortium doing the deal includes private investment firm Sun Capital Partners (whose retail portfolio includes Sam Goody and Wicke's Furniture, among others), and fund managers Cerberus Capital Management and Lubert-Adler/Klaff and Partners. The group is also acquiring four distribution centers, and has said Mervyn's will remain headquartered in Hayward, Calif., and will continue to operate as an ongoing business.

In a separate deal, Target plans to sell Mervyn's credit card receivables — approximately $475 million — to GE Consumer Finance, a division of General Electric Company.

Target expects the sale to contribute a pre-tax gain in the range of $270 million, or 18 cents per share, in the third quarter.

Target's recent sale of its Marshall Field's stores to May Co. for $3.2 billion in cash included three DCs and approximately $600 million in Marshall Field's credit card receivables.

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