Sears, Kmart merge: South Shore retailers unsure of effect here

Megan Reichgott

CHICAGO (AP) – Kmart is acquiring Sears, one of the most venerable names in U.S. retailing, in a surprise $11 billion deal that will create the nation’s third-largest retailer.

The company being created by the combination announced Wednesday would be known as Sears Holdings Corp., but it was clearly orchestrated by Kmart chairman and Sears shareholder Edward Lampert, who will lead a new board that will be dominated by Kmart directors. The company said it will continue to operate the Kmart and Sears stores under their current names, but some locations may close or switch from one to the other store.

It’s too soon to tell what will occur here locally.

Mary Grant, assistant manager of Kmart South Lake Tahoe, said major changes could occur by February. In her 21 years as an employee, her experience has told her the first quarter brings on change, she said Wednesday.

Otherwise, local management of the mass merchandiser has received no word of store closures or layoffs.

Hamid Heydarian, who owns the Sears at Round Hill, said that morning the merger has been the topic of the day at his store. He’s also received no insider knowledge of the buyout’s impact.

“If Kmart carries appliances, that’ll kill me. It’s not going to work,” he said, projecting the impact of a local merge of merchandise.

Shares of both companies surged on news of the deal. Kmart Holding Corp. shares climbed $17.38, or 17 percent, to $118.60 on the Nasdaq Stock Market, while Sears, Roebuck & Co. shares soared $9.69, or 21 percent, to $54.89 on the New York Stock Exchange.

The deal marks a remarkable comeback for Kmart, which had sharply scaled back operations after seeking bankruptcy protection in 2002. The combined companies expect to save more than $300 million a year by improving operations and combining their purchasing power.

“We need to have a very low cost structure in order to compete with our biggest competitors,” Lampert said at a news conference in New York.

Lampert would not provide any details on possible layoffs, except to say, “There will be some head count changes that come out of this.”

Both companies’ roots date to the late 1800s. Sears began as a mail-order house while Kmart began as the Kresge five-and-dime chain. Sears, which opened its first retail store in 1925, eventually became the nation’s biggest retailer, a title it held until just 13 years ago.

The combined company is expected to have $55 billion in annual revenues and nearly 3,500 stores. That means it will trail only Wal-Mart and Home Depot among the biggest U.S. retailers.

It will have its headquarters in the northwestern Chicago suburb of Hoffman Estates, home of Sears, but will maintain a “significant presence” in Troy, Mich., where Kmart is based.

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

With Lampert as chairman, Sears CEO Alan Lacy will be vice chairman and CEO of the new company. The 10-member Sears Holdings board will have seven members from Kmart and three from Sears.

Lampert, Kmart’s majority shareholder, is also Sears’ largest shareholder, holding a 15 percent stake in Sears through his ESL Investments Inc.

The merger, expected to close by the end of March, is subject to approval by Kmart and Sears shareholders and regulatory agencies.

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

It emerged from bankruptcy in May 2003 and on Wednesday posted its fourth consecutive quarterly profit. Its stock price has risen to $101.22 on Tuesday from $15 a share when it emerged from bankruptcy.

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.

Kmart has been shedding many of its underperforming stores, a strategy that has helped it bounce back. In fact, it has sold 50 of those stores to Sears for $575 million.

It has appeared that Sears could be shifting toward a similar real estate strategy since the disclosure that Vornado Realty Trust, a real estate investment trust, had purchased a 4.3 percent interest in the chain. Since that Nov. 5 announcement, Sears’ stock has jumped 25 percent, closing at $45.20 Tuesday.

The merger will not affect agreements to carry home and fashion lines including Martha Stewart Everyday, Lands’ End and Sesame Street, the companies said.

Wal-Mart dethroned Sears as the nation’s largest retailer in 1991.

Sears dates to 1886, when Richard W. Sears started a watch company. Alvah C. Roebuck joined the company the following year as a watchmaker, and within a few years they expanded to a mail-order general merchandise business. The first Sears catalog was issued in 1896. The company opened its first stores in the 1920s.

The first Kmart discount store was opened in 1962 by the S.S. Kresge Co., the chain founded in 1899 by Sebastian S. Kresge. In 1977, after Kmart sales grew to more than 90 percent of Kresge’s total sales, the company name was changed to Kmart Corp.

– Tribune staff writer Susan Wood contributed to this report.

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