New Miracle on 34th Street?

By Daniel Benjamin

For Federated Department Stores, surrender seemed an imminent and lamentable - fate. After a long, five-week siege, the largest U.S. department-store owner had all but given up hope of fending off a takeover raid from the north by Canadian Developer Robert Campeau, who had offered $6.1 billion, or $68 a share, for the Cincinnati-based retailer. But as happens routinely in romances and rarely in corporate struggles, the whitest knight conceivable appeared last week. The venerable R.H. Macy & Co., an all-American name that evokes images of Thanksgiving Day parades and the classic movie Miracle on 34th Street, made a comparable last-minute counterbid for Federated. Corporate rescues, though, are never as certain as chivalric ones. While Federated seized on Macy's offer, Campeau refused to withdraw from the field.

Campeau and Macy's are vying to form a retail colossus. Federated (1987 sales: $11.1 billion) owns 650 stores, including such lucrative chains as Bloomingdale's, based in New York City, and San Francisco's I. Magnin. If Federated combined with either Macy's (97 stores, 1987 fiscal-year sales: $5.2 billion) or Manhattan-based Allied Stores (286 stores, estimated 1987 sales: $3.5 billion), which Campeau Corp. bought in 1986, the merger would be the largest in retail history.

When Campeau made his initial offer for Federated on Jan. 25, the company's management was aghast. Since taking over Allied, Campeau has arranged the sale of 16 of the company's 22 divisions and sent scores of top executives packing; all told, he eliminated an estimated 4,000 jobs. Federated feared a similar dismemberment at the hands of Campeau, 63, a self-made French-Canadian tycoon who may be more interested in real estate than in accumulating stores.

Enter Macy's. The 130-year-old company, founded by a former Nantucket whaler, stunned Wall Street by joining the fray. Chairman Edward Finkelstein, a shrewd, 40-year veteran with the company, had taken the firm private in a $3.7 billion leveraged buyout in 1986. Loaded with debt after that deal, Macy's seemed incapable of takeovers. Says Pavlos Alexandrakis, a retail analyst for Argus Research: "It's the last company you would expect to be out shopping."

To Federated managers, Macy's entrance made perfect sense. They were reassured by Finkelstein's retailing record and his interest in keeping Federated's prime chains. By a unanimous vote, Federated directors accepted Macy's bid. But stockholders may not follow. Because Macy's offer involves cash and a future stock swap of Federated shares for shares in the new firm, * the value is unclear. The two bids are believed to be comparable, but Federated stockholders have to decide whether they want a payoff now from Campeau or bet on the fate of Macy's-Federated.

Another concern is Macy's potential antitrust problems. In Atlanta, Macy's and Rich's, a Federated chain, control almost all the department-store business. In New York City, Macy's stores and Federated's Abraham & Straus and Bloomingdale's are the top three operations.

Whatever the antitrust obstacles, Campeau and Macy's will slug it out. Campeau, a onetime machinist and the seventh of 13 children from a poor family, has shown a scrapper's stubbornness in battles with Canada's business establishment. One example: his bruising but failed 1980 bid for Royal Trustco. He will need more of that tenacity to best Finkelstein and block another retailing miracle on 34th Street.

With reporting by Thomas McCarroll/New York