May makes a deal, scraps a buyback

May Department Stores Co. said it has cut a deal to raise $2.2 billion in a private-placement offering to help fund its $3.2 billion buyout of the 62-unit Marshall Field's department store group and nine Mervyn's stores from Target Corp.

May said the debt is structured in staggered tiers that range from three to 30 years, including $400 million of 3.95 percent notes due in 2007; $600 million of 4.80 percent notes due in 2009; $500 million of 5.75 notes due in 2014; $300 million of 6.65 percent notes due in 2024; and $400 million of 6.7 percent notes due in 2034.

At the same time, hoarding its cash reserves, the retailer said it is canceling a $500 million stock buyback begun in February. The retailer had already bought back about $18 million in common stock under the program.

Apparently unimpressed with the deal, Moody's Investors Service, one of the big three corporate credit-rating agencies, said it's downgrading its rating of May senior unsecured debt to Baa2 from Baa1. Moody's said the downgrade was triggered by the high price May is paying and the debt load it's taking on to finance the deal.

Seeming to question the price tag, Moody's said, "May will pay a very full price of $3.24 billion in cash, entailing an increase in debt that is material given current debt balances of only about $3.9 billion. May is taking on an addition $2.2 billion in debt to finance the deal, increasing its total debt load by about 56 percent."

Posing a challenge going forward, Moody's noted that "Marshall Field's operating margin of about 4.5 percent is low for a department store business. Efforts to improve Marshall Field's profitability will require some management time and attention, and may not yield expected results in a timely basis."

On a more positive note, Moody's said it's lowering May's rating only a single notch "because of the benefits of the Marshall Field's franchise."

Moody's explained, "Field's gives May a larger presence in three major metropolitan markets, and a well established banner that is as strong as any of May's existing ones. The limited geographic overlap of the combined stores, the similar customer demographics, the solid quality of Field's stores and the modest projected synergies — at an annual rate of $180 million in fiscal 2007 — should ease the normal challenges of integration."

But the rating could be lowered further, Moody's cautioned, "if the integration of Field's is not completed in a timely manner, if deterioration in May's competitive position causes erosion in market share and a sustained period of negative comparable store sales. A downgrade could also be triggered if, after a year, certain key metrics cannot be met, including a fixed charge coverage of 3 to 3.5 times."