Lampert's Big Bargain Score

Edward Lampert (search), the hedge fund manager with ambitions to reshape the retailing landscape, is worth a few more millions, thanks to a deal, announced yesterday, in which Kmart Holding Corporation (KMRT) will buy Sears, Roebuck and Co.(S).

In paper profits alone, Lampert, who scooped up 53 percent of Kmart and 14.6 percent of Sears at bargain prices, saw the value of those investments increase by $883.2 million to $7 billion, as investors showed their enthusiasm for the deal by bidding up the stock prices of both companies.

Just two years ago, Lampert was at a low point. The 42-year-old had been held for 30 hours at a Connecticut motel in a bizarre kidnapping by four young men seeking to extort $5 million. He was released unharmed.

Yesterday, Kmart shares jumped $7.78, or 8 percent, to close at $109 in trading. The shares of Sears climbed $7.79, or 17 percent to $52.99.

Another beneficiary was Martha Stewart Living Omnimedia (MSO), whose stock gained $1.09, or 6 percent, to close at $18.49, on the expectation that the Domestic Diva's line of Everyday products sold at Kmart would now be available in Sears.

The combination would create a powerhouse with $55 billion in annual sales and some 3,500 stores nationwide, making the new company, to be called Sears Holdings Corporation, the third largest retailer in the country, behind Wal-Mart (WMT) and Home Depot (HD).

Speculation has swirled for some time that Lampert would push to combine his holdings in Sears and Kmart, but it appears that discussions got underway in earnest last spring when Sears purchased 54 Kmart stores.

"We saw an opportunity for many more" stores, said Alan Lacy, the chief executive of Sears, who will be CEO of the combined companies."

Talks heated up two weeks ago, when Aylwin Lewis, who joined Kmart as chief executive last month and who will remain in that post, while adding the additional title of president of Sears, was apprised of the discussions.

The $11 billion transaction is the largest retail merger ever, surpassing Campeau's $7.8 billion acquisition of Federated Department Stores in 1988, according to Thomson Financial.

Lampert, the architect of the deal and the new company's chairman, drew comparisons yesterday, in a conference call, to the financial mergers that reshaped the banking industry over the last decade.

"Scale is very important," Lampert said.

He argued that the combination of Sears' brand name products and Kmart's off-the-mall store locations would create a powerful new competitor.

Although details were scarce, the expectation is for Kmart to convert several hundred stores to the Sears format, allowing Sears to pursue its existing strategy of lessening its dependence on the nation's shopping malls by expanding into strip centers and urban locations.

At the same time, Sears would likely make its brand-name products, under the Kenmore, Craftsman and DieHard names, available to Kmart, which in turn would provide Sears with popular lines like Martha Stewart and Joe Boxer.

Lampert said he expects savings of $500 million annually, beginning three years after the deal closes, mainly by combining back office functions, like sourcing and accounting.

As a sign of his confidence in the deal, Lampert said his ESL Investment Partners had elected to receive stock in the new company in exchange for their existing shares, forgoing a cash alternative.