In a decidedly unfriendly turn of events, May Department Stores said Wednesday that it will launch a hostile $60-per-share cash tender offer for Associated Dry Goods.
The St. Louis retailer said it is making the tender offer as a way of keeping its options open in case Associated rejects a friendly, $66-per-share stock swap offer made by May.
May Department Stores, which owns May Co. California, said it will begin its tender offer today for 51%, or about 21 million, of Associated's outstanding common shares. May would complete the merger by offering May common stock or other securities worth $60 per share for the remaining Associated stock, making the total offer worth about $2.4 billion.
The proposed merger would create a company that would vie with Federated Department Stores for the title of the nation's largest department store retailer.
May disclosed its first bid on Sunday, offering to buy Associated for stock worth $66 per common share. The company also offered to pay $211.20 for each share of Associated's convertible preferred stock.
No Response to First Offer
Associated, owner of Robinson's and Lord & Taylor, hasn't responded to the original $2.7-billion offer other than to ask for more time to consider it. And, on Wednesday, Associated officials had no comment on May's latest announcement.
Associated stock rose Wednesday on the New York Stock Exchange by 50 cents to close at $65.75 a share. May closed at $82 a share, down 37 1/2 cents.
May Department Stores' latest offer came in a letter from May Chairman David C. Farrell. He told Associated Chairman Joseph H. Johnson he is "pleased" that the Associated board is considering the earlier offer.
"While your considerations continue, given the market dynamics that exist, we have determined that it is necessary for us to take further actions with respect to our possible acquisition of Associated Dry Goods," Farrell said.
"I would like to emphasize that we are making this cash offer for the purpose of preserving our options, and that we would very much prefer to consummate the June 20 merger proposal which you are currently considering."
Farrell also gave Associated a deadline--the date that May would start buying stock under the tender offer announced Wednesday. If Associated doesn't accept the earlier offer by then, May will attempt to complete the lower, two-part hostile offer, Farrell said.
A May Department Stores spokesman declined to reveal the deadline date, saying it will be included in the tender offer documents, which weren't available Wednesday.
Analysts had speculated that Associated would be sold at a slightly higher price, either to May or to another suitor.
"I think it's a good strategic move on their (May's) part," said Sarah A. Stack, an analyst with Bateman Eichler, Hill Richards in Los Angeles. "It does create some flexibility for May."
In addition, the move might keep a third party from entering the fray with a later tender offer, she said.
Farrell said the cash tender offer will be subject to various conditions, which he didn't list. He also said May reserves the right to modify or withdraw its original stock offer.
The difference in price between the two proposals "reflects our strong preference" for a merger involving an exchange of stock, Farrell said. For accounting purposes, a friendly stock exchange merger would be treated as a "pooling of interests" and would be tax-free to the corporation and shareholders. Under the pooling-of-interests method of accounting, the balance sheets of the merging companies are simply added together.
A cash and stock merger would be treated as an investment by the purchasing company. In that case, the assets of the acquired company are added to the acquiring company's assets at their book value. The transaction would then be taxable as capital gains to the sellers.
"We hope that the shareholders of Associated Dry Goods will be allowed the opportunity to gain the additional value contained in our merger proposal and to that end we await your board's response and remain willing to meet with you at any time to discuss our merger proposal," Farrell said.