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Bidding war erupts for Woodies

THE BALTIMORE SUN

The bidding war is on.

Less than 24 hours after May Department Stores Co. and J. C. Penney Co. unloaded a joint offer to acquire Alexandria, Va.-based Woodward & Lothrop Inc., analysts and officials involved in the deal speculated that competitor Federated Department Stores would be forced to up the ante.

Federated -- mum for the moment -- has 10 days to decide.

At stake is a cache of Woodies department stores in the Baltimore-Washington market and, through the chain's subsidiary, John Wanamaker stores in the Philadelphia region -- both strategic and lucrative markets in an increasingly consolidating and competitive department store industry.

"This [May] bid will put tremendous pressure on Federated to consider raising their bid," said Wilbur L. Ross, a senior managing director at Rothschild Inc. and a financial adviser to Woodies' unsecured creditors.

Cincinnati-based Federated, which operates Macy's and Bloomingdale's, has offered a deal that would bring in an estimated $640 million in gross proceeds, including a purchase price of $565 million to $568 million and the sale or liquidation of assets apart from the deal.

St. Louis-based May, which operates Hecht's and Lord & Taylor stores, has put on the table a proposal that would generate $704 million in gross proceeds, including an unspecified purchase price.

But those are just numbers.

"The key number here is distributable value to creditors," said Peter Chapman, president of New Jersey-based Bankruptcy Creditors' Service Inc.

May asserts it would distribute $409 million among creditors of Woodies -- $58 million more than Federated's $351 million. But even that may not be enough: May lost out to Federated in a previous round when it offered $372 million in distributable value to creditors.

If Federated counters, it is unclear whether May would bid again: "Our policy is not to discuss our business strategy," said May spokesman Jim Abrams.

But May has at least one advantage, a strong balance sheet with little debt, unlike leveraged Federated. Should an auction materialize for Woodies, which has operated under bankruptcy court protection since January 1994, bidders must raise the price in $5 million increments until -- and perhaps even into -- the sale hearing in bankruptcy court on Aug. 8.

The entry of May into the bidding game appears to present a classic case of two industry heavyweights trying to protect their turf and march into new territory: The deal would open the door for May to the Philadelphia market, where it operates one store (a Lord & Taylor) and is preparing to open four more stores (a second Lord & Taylor and three Hechts).

But even more, a Federated takeover of Woodies stores in the Baltimore-Washington corridor would strengthen Federated's soft presence in the area but threaten May, the leading chain in the region operating 23 Hechts and four Lord & Taylor department stores.

"This is a market that Federated needs to be in, and this is a market that May needs to lock Federated out of," said Kenneth M. Gassman Jr. of the Richmond investment house Davenport & Co.

Which could mean another round of bidding. "I don't know, but I'll tell you, because of the move May made . . . it would appear that May and J. C. Penney are the front-runners for the Woodward and Lothrop operation," Mr. Gassman said. "I have to believe that Federated will take another look at their bid."

Meanwhile, Woodies is evaluating May's offer.

"Presumably, if the noneconomic issues are the same, it becomes an economic issue, and if in fact the May bid distributes a value $58 million more to creditors, then that presumably would be the best bid," said Woodies spokeswoman Sandra Sternberg. "We will know by the time we get to court."

But already the chain knows that Federated, having established a working relationship with Woodies, which Ms. Sternberg said gives it "a heads up. . . . It can close [the deal] immediately. Can May do the same thing?"

Woodies also knows that both bidders are courting employees. Federated has committed to keeping on more than half of Woodies' work force of 9,000. May is offering to hire 3,900 immediately and another 3,100 over 12 months. Both would hire all of Wanamaker's 3,000-plus employees. But May has gone one step further, reversing course by pledging not to oppose the unionization of its Hecht stores in the D.C. area, which would include 2,800 Woodies employees already in Local 400 of the United Food and Commercial Workers Union. Federated's offer was limited to Woodies' 2,800 union employees.

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