In a surprise move, ailing discount retailer Kmart (KMRT) is buying Sears (S) for $11 billion. The merger will create the third largest retailer. Wal-Mart (WMT) and Target (TGT) are number one and two.
The stocks of both Kmart and Sears jumped on the announcement. Everyone associated with the deal touted the benefits.
- Kmart will sell Sears appliances and tools
- Sears will pickup low-price clothing, including the Martha Stewart line of home products
Two Weak Stores
The question is: can two weak retailers become one strong retailer?Kmart just came out of Chapter 11 bankruptcy in 2003. It has cash because it has closed a number of stores and sold off prime real estate.
Sears has continued to struggle. It brought Lands’ End clothing into its stores without much success.
Yet the combination of the two gives them greater buying power to compete with Wal-Mart and, more importantly, fills in gaps in each stores merchandise line.
Shareholders
According to the merger, Sears’s shareholder will get either $50 in cash or one-half share in the merged company – to be known as Sears Holdings - for their stock.Kmart shareholder will get one share of the new company for each share they own.
Although billed as a retail merger, some analysts are suggesting that it is really a real estate deal. The two companies own about 3,500 stores and both have seen their stock rise this year after real estate transactions.
In any case, the merged company still faces an uphill battle against years of consumer perception that will have to be changed.
Just because Kmart has Craftsman tools and Sears appliances for sale doesn’t mean it will be top of mind when people think about shopping for those items. Likewise, Sears won’t naturally come to mind as a discount-clothing store.
Addressing and changing those perceptions will cost a lot of advertising dollars. Time will tell if the combined companies can pull it off.
