US retail major Kmart Holding Corp and America's largest departmental-store chain Sears, Roebuck & Co, on Wednesday, agreed to merge in an $11 billion cash-and-stock deal.
The merger will combine Sears and Kmart into a major new retail company named Sears Holdings Corporation.
Sears Holdings will be America's third largest retailer, with approximately $55 billion in annual revenues, 2,350 full-line and off-mall stores, and 1,100 specialty retail stores, BusinessWire said.
Both Sears, Roebuck and Kmart have made significant strides in transforming their organizations, and the merger will further accelerate this process for both companies.
Sears Holdings will be headquartered in Hoffman Estates, Illinois, and Kmart will continue to have a significant presence in Troy, Michigan. The combined business will have a broader retail presence and improved scale through a national footprint of nearly 3,500 retail stores.
Under the terms of the agreement, which was unanimously approved by both companies' boards of directors, Kmart shareholders will receive one share of new Sears Holdings common stock for each Kmart share.
Sears, Roebuck shareholders will have the right to elect $50.00 in cash or 0.5 shares of Sears Holdings (valued at $50.61 based on yesterday's closing price of Kmart shares) for each Sears, Roebuck share.
Shareholder elections will be prorated to ensure that in the aggregate 55 percent of Sears, Roebuck shares will be converted into Sears Holdings shares and 45 percent of Sears, Roebuck shares will be converted into cash.
The current value of the transaction to Sears, Roebuck shareholders is approximately $11 billion. The transaction is expected to be tax-free to Kmart shareholders and tax-free to Sears, Roebuck shareholders to the extent they receive stock.
Edward S Lampert, chairman of Kmart, will be the chairman of Sears Holdings. He will be joined by Alan J Lacy, chairman and chief executive officer of Sears, and Aylwin B Lewis, president and chief executive officer of Kmart.
Lacy will be vice chairman and chief executive officer of Sears Holdings; Lewis will be president of Sears Holdings and chief executive officer of Sears Retail.
Glenn R Richter, executive vice president and chief financial officer of Sears, Roebuck, will be executive vice president and chief financial officer of Sears Holdings.
The merger is estimated to generate $500 million of annualised cost and revenue synergies to be fully realised by the end of the third year after closing. The transaction, after giving effect to estimated synergies, is expected to be significantly accretive to earnings per share in the first year before one-time restructuring costs.
The companies expect to realise approximately $200 million in incremental gross margin from revenue synergies by capitalizing on cross-selling opportunities between Kmart and Sears' proprietary brands and by converting a substantial number of off-mall Kmart stores to the Sears nameplate in addition to the 50 Kmart stores Sears acquired earlier this year.
The company expects to achieve annual cost savings of over $300 million principally through improved merchandising and non-merchandising purchasing scale as well as improved supply chain, administrative and other operational efficiencies.
In addition, the combined company will complete a full store asset review as part of a plan to monetize non-strategic real estate assets as appropriate.
Lehman Brothers served as financial adviser to Kmart, and Simpson Thacher & Bartlett LLP provided legal counsel to Kmart. Morgan Stanley served as financial adviser to Sears, and Wachtell, Lipton, Rosen & Katz provided legal counsel to Sears.
