A merger of two U.S. retailers, valued at $11.5 billion, is a promising solution for the two companies as the new retailer is expected to reach the U.S. No. 3 position.

 

Kmart Chairman Edward Lampert as the largest shareholder for Sears will gain profits from the merger, analysts say.

 

Mr. Lampert is planning to improve the profitability of existing stores and sell off unprofitable ones.

Edward Lampert will be chairman of the new company, and Sears Chairman and Chief Executive Alan Lacy to be vice chairman and chief executive officer.

 

``The combination will greatly strengthen both the Sears and Kmart franchises by accelerating the Sears off-mall growth strategy and enhancing the brand portfolio of both companies,'' Sears Chairman and Chief Executive Alan Lacy said in a statement.

 

Kmart shareholders are expected to get one share of new Sears Holdings common stock for each Kmart share. Sears shareholders will have the right to elect $50 in cash, or 0.5 share, of Sears Holdings.

Kmart’s largest shareholders seem cautious about the deal. "This deal materially enhances their prospects, but the verdict is not in yet. Why don't we talk again in three years." said Marty Whitman, the chief investment officer of Third Avenue Management.

 

After the announcement, Sears, Roebuck & Co. debt was put on Rating Watch Negative. "The Rating Watch reflects the risks associated with combining two underperforming retailers, uncertainty as to the new company's operating, financial and real estate strategies, and reduced financial flexibility as a result of the cash outlay required to complete the merger," Fitch analysts wrote in a statement.

 

Sears credit rating is forecast to be "BB," Standard & Poor's said, as compared with the present "BBB" rating. "It is likely that ratings for Sears and the new holding company parent, Sears Holdings Corp., will be in the 'BB' category upon completion of the merger, which is scheduled for the end of March 2005," wrote S&P credit analyst Gerald Hirschberg.