Months of rumor and speculation came to an end today when financially troubled ZCMI confirmed it has agreed to sell the pioneer department store chain to St. Louis-based The May Department Stores Co.
ZCMI and The May Co. said they had agreed to a $52 million merger in which ZCMI shareholders will receive shares in May company stock equivalent to $22.50 for each share of ZCMI. The deal is subject to shareholder and regulatory approval.ZCMI will become part of Meier & Frank, a Portland, Ore.-based division of May Co.
ZCMI Reserve Trust, a charitable trust of The Church of Jesus Christ of Latter-day Saints, holds 51.7 percent of the outstanding shares. The rest are owned publicly.
Under the agreement, ZCMI's downtown flagship store will remain closed permanently on Sunday, but the company's other 13 stores -- 11 in Utah and two in Idaho -- will remain closed on Sundays as long as they carry the ZCMI name, which the agreement says cannot be for more than two years.
"This is consistent with church doctrine of honoring the Sabbath and with longtime ZCMI policy," said Bruce L. Olsen, managing director of public affairs for the LDS Church.
He said the deal does not affect the value of ZCMI stock for purposes of the merger. "Thus, the stock price of $22.50 per share reflects the full market value of the ZCMI shares."
The sale comes less than two weeks after President Gordon B. Hinckley indicated in the church's General Conference that the church has divested itself of some operations begun in pioneer times that were no longer "central to its mission."
President Hinckley said the church has divested itself of some of those businesses where it was felt there was no longer a need for them, citing banks once owned by the church.
May Co. operates 402 department stores in 33 states and the District of Columbia. Its stores include Lord & Taylor, Hecht's, Strawbridge's, Foley's , Filene's, Kaufmann's, L.S. Ayres, The Jones Store, Meier & Frank, Famous Barr, Robinsons May and John Wanamaker.
ZCMI, founded in 1868 by The Church of Jesus Christ of Latter-day Saints, currently has 14 stores and some 4,500 employees.
The rumors of the impending sale have done wonders for ZCMI's stock. After trading for years in a narrow range of $14 to $15 per share, ZCMI's NASDAQ-traded shares have shot up 54 percent since August to $22.
Sterling Jenson, president and CEO of First Security Investment Management Inc., couldn't think of another stock that had shown that kind of increase in the down market of the past two months, especially in shares so lightly traded as ZCMI.
"It doesn't trade much (ZCMI said last spring it had a total of 1,540 shareholders), " said Jenson. "Their 10-day average trading volume is only 1,500 shares per day. That's pretty light volume."
But if ZCMI shareholders have been profiting on the takeover rumors, May Co. shareholders have been unimpressed. May's shares were at $36.25 in early trading today, down from a high this year of $45 and a high last year of $47.
Can May Co. turn around ZCMI's $8.5 million in losses last year and some $6 million in the first half of 1999? Jenson says that remains to be seen.
"It just depends on the politics of ZCMI. Maybe the new owner can do some cost-cutting that ZCMI was disinclined to do. And as a much larger company, May could have purchasing power that would reduce the costs of goods.
Jenson noted that ZCMI has had to face an enormous array of hurdles in the changing retail environment, from so-called "big box" stores and discounters to factory outlets and the enormous growth of the Internet as a gigantic shopping mall.
"And the downtown construction has hurt them badly, at least their flagship store. People haven't been coming downtown to shop."
Moreover, he says ZCMI has had to fight its image as being an "older person's" store when it's young people who are doing the spending on clothing these days. "Demographics have been working against them," he said.
According to Banc of America Securities, May outperforms the department store industry on most profitability measures. It generates annual cash flow of $340 million, which provides "tremendous" operating capital and means May could "leverage its operational expertise to fix an underperforming chain," a scenario made to order for turning around ZCMI.
Sally Wallick, a retail analyst with Legg Mason Wood Walker Inc. in Baltimore, said May's purchase of ZCMI looks like "a natural fit."
May has been a major player in the consolidation that has swept the department store industry, Wallick said, and ZCMI seems like May's kind of store.
"For example, here they have the Hecht company, and it is a traditional department store. Not like a Sears or a Penneys, it's above that, and below a Nieman Marcus or something like that," Wallick said. "From what they told me in terms of the positioning of (ZCMI), this is consistent with some of the other stores May operates."
Like the 131-year-old ZCMI, May Co. has a rich heritage dating back to the 19th century. The company was founded in 1877 in Leadville, Colo., a silver-mining boom town. In 1892, David May and three brother-in-law partners bought The Famous Clothing Store in St. Louis and in 1898 a department store in Cleveland. In 1905, the headquarters was moved to St. Louis, where May has pursued an aggressive expansion plan over the years.
Last year, May had its 24th year of record sales and earnings per share, declared a three-for-two stock split and a new annual dividend rate of $1.335 per share. The company bought 13 stores last year.
Jennifer Roberts, communications manager with the International Mass Retail Association, said customers probably can expect more department store mergers and acquisitions as retailers move into a more global economy.
"The trick for retailers, and it's something they're keenly aware of and working on, is that they're going global in scope, but they need to remain local in atmosphere," Roberts said today.
Roberts predicts department store chains that buy smaller chains will do their best to target their merchandise and service to the local community.
"You see this a lot in food stores: some have certain foods in some areas but not in others. It's the same in clothing stores. The successful ones try to remain local to give customers what they want while still relying on the national chain to have national distribution."
Roberts said the merchandise in stores owned by May varies from market to market, depending on the demographics and customer demand, and the appearance of the stores also can be different, depending on the region.
ZCMI customers might benefit from the purchase since May Co. has been doing well financially. "They might be able to bring in extra money and stability. One reason many companies are going global, besides consumer demand, is that you've got a distribution center set up and it's much easier with a national distribution center to get hinges. You don't get out of stock," Roberts said.
Business writers Gregory P. Kratz, Linda Thomson and Jenifer K. Nii contributed to this report.