Proffitt’s, Saks in $2.1-Billion Takeover Deal

Luxury retailer Saks Fifth Avenue has agreed to be bought by Birmingham, Ala.-based Proffitt’s Inc., one of the country’s fastest-growing department store chains, for $2.1 billion in stock, the firms said Sunday.

The combined company, headed by former Tennessee legislator R. Brad Martin, would operate 330 stores in 38 states with estimated 1998 revenue of more than $6 billion. Proffitt’s parent company, which moved recently from Knoxville, Tenn., would change its name to Saks Inc. when the deal is complete. Saks stores would keep their name and all merchandising, sales and buying operations would remain in New York, said Julia Bentley, a Proffitt’s spokeswoman.

In a prepared statement, Martin said he targeted Saks for its trophy name and because he feels the market for luxury goods is growing at a rapid clip. Based on the strength of the name, he also plans to expand the brand around the world.

“We see prospects to expand the Saks Fifth Avenue brand on a global basis, in both its core business and into new retail formats,” Martin said.

Analysts say the deal gives the aggressive, little-known Proffitt’s name recognition and high-end merchandising savvy in California, where Saks operates nine department stores and seven outlet stores.

“California is a huge market and this gives Proffitt’s a bridge into the state,” said Kurt Barnard, a New Jersey-based retail economist. “There are advertising and distribution synergies if this new company wants more department stores and luxury outlets in the West.”

Proffitt’s now operates 230 department stores in 24 states across the Southeast and Midwest under the Proffitt’s, McRae’s, Younkers, Parisian, Herberger’s and Boston Store names.

While other major department store chains have been shrinking, Proffitt’s has been expanding rapidly under Martin’s aggressive leadership, boosting earnings an average of 20% annually over the past five years.

It became the country’s fourth-largest department store chain earlier this year when it purchased retailer Carson Pirie Scott & Co. Only Federated Department Stores Inc., May Department Stores Co. and Dillards Inc. are bigger.

For the fiscal year ending May 2, Proffitt’s posted earnings of $139.6 million on record sales of $3.6 billion.

Saks operates 41 Saks Fifth Avenue stores, eight specialty resort stores and 40 of its Off 5th outlet stores in 27 states. It also operates Folio, a direct-mail business. The company’s earnings rose 95% to $55.8 million on sales of $2.2 billion in its last fiscal year. For the first quarter ending May 2, earnings rose 15.1% on sales of $582.9 million.

Hoping to capitalize on this strong financial performance, Saks announced in late June that it was considering a sale or a merger. Although the company had become increasingly profitable, its stock had languished in part because of high debt levels.

Industry sources speculated that the company’s board was being pressured by majority owner Investcorp International, a Bahrain-based investment bank, to divest while the market for luxury goods is strong. In the past, Investcorp has timed its other divestitures well, profitably selling off holdings in Tiffany and Gucci.

Under the terms of the deal, Saks shareholders would receive .82 share of Proffitt’s common stock for each share of Saks stock they own. Based on Proffitt’s closing price of $40.69 a share Thursday, the deal is worth $2.1 billion. The merger is expected to be completed in the third or fourth quarter of this year, pending shareholder and regulatory approval.