Federated Department Stores, the parent company of Bullock's and Ralphs and for months the subject of takeover rumors, said Friday that it has paid $195 million to buy back 2.2 million of its shares from "a single holder."
On Wall Street, the belief was that Federated had bought the stock from Dart Group in an effort to fend off a potentially unfriendly takeover by the East Coast company. Dart's name resurfaced last month as a bidder for Federated, which with $10 billion in annual sales is half the size of Dart's most recent target, Safeway Stores.
Controlled by the elusive father-son team of Herbert H. and Robert M. Haft, Dart Group reportedly had accumulated a stake in Federated of just under 5% of Cincinnati-based Federated's 49 million outstanding shares.
Observers Divided on Profit
Industry observers were divided on whether Federated's purchase, at $88.875 a share on Thursday, was made at a premium to get out of Dart's shadow. One New York investor familiar with Dart estimated the group's profit at between $10 million and $20 million. He suggested that the purchase might risk attracting other suitors interested in being bought out at a profit. "All they're telling you is, 'Look, we're subject to greenmail,' " he said.
However, sources at Federated said they were told that the seller took a $5-million loss. Federated divisions were informed of the transaction in a Friday morning conference call.
In its statement Friday, Federated also said its board has authorized the repurchase of an additional 5 million common shares "from time to time." The company announced a similar authorization last month.
If Federated buys back all of the 10 million authorized shares, it would shrink its base of outstanding common shares by 20%. "That would help get the stock price up and make them less vulnerable to a takeover," said William N. Smith, an analyst at Smith Barney, Harris Upham in New York. "It's not coincidental that the announcement of the second 5 million came when the stock price (had fallen) $13.25 in a week."
$500 Million in Cash
With an estimated $500 million in cash on hand, Dart is in fine shape to go shopping for a company. About $140 million of that war chest was derived from the sale of Safeway Stores holdings after that supermarket company agreed last summer to a $4.1-billion leveraged buyout by the New York investment banking firm of Kohlberg Kravis Roberts & Co. to thwart Dart's advances.
During its takeover effort, Dart was advised by Drexel Burnham Lambert, now the subject of insider trading investigations. Holdings of Dart Group, formerly a drugstore operation, include about two dozen shopping centers and the Crown Books and Trak Auto discount chains. The drugstore business was sold to employees in 1984.
Despite the widespread opinion that Wall Street's insider trading turmoil might slow the galloping pace of takeovers, speculation was rampant that Dart is bolstering its cash to pursue another target.
Among those named was Stop & Shop, a profitable operator of Northeast supermarkets and discount stores with $3.7 billion in sales. May Department Stores, which just completed its acquisition of Associated Dry Goods, was also named as a possible target.
Wall Street sources said Stop & Shop, based in Boston, appears to be a particularly attractive candidate. One investor said that the company's supermarket operation is considered to be "fantastically well managed" but that its Bradlees discount operation has been "a little bit out of control" during three years of rapid expansion. He estimated the value of Bradlees at $1.1 billion.
In trading on the New York Stock Exchange, May was the seventh most active issue, rising $2 a share to $37.375 on volume of nearly 2.2 million shares. Stop & Shop closed up $3 at $53.50, while Federated shares fell 12.5 cents to $86.625. Dart, which trades over the counter, rose $2.50 to $160.