Federated Buys Fingerhut for $1.7 Billion

Federated Department Stores (NYSE:FD) announced plans this week to acquire catalog and direct marketer Fingerhut Companies, Inc. (NYSE:FHT), in a merger valued at $1.7 billion (US$). The deal looks like a good one for both companies, with Federated getting the benefit of Fingerhut’s expertise in direct marketing and e-commerce fulfillment, and Fingerhut getting capital and backing from one of the largest department store retailers in the U.S.

Federated said Fingerhut’s state-of-the-art infrastructure for catalog and Internet order fulfillment, coupled with its prowess in database management and direct marketing, provides an excellent platform for further growth through e-commerce. Federated, owner of Macy’s, Bloomingdale’s, and numerous other department store chains, already operates an e-commerce site at Macys.com, while Fingerhut is involved in a number of e-commerce businesses, including its core site at Fingerhut.com.

“Joining forces with a company such as Fingerhut allows us to capitalize on and leverage our own retailing strengths and infrastructure in new, rapidly expanding channels. The acquisition, therefore, will help fuel Federated’s potential for continued growth,” said James M. Zimmerman, Federated’s chairman and CEO.

On the other side of the deal, Ted Deikel, chairman and CEO of Fingerhut, said that the acquisition by Federated will provide Fingerhut with capital need to expand e-commerce and related marketing efforts more rapidly, concluding that, “this is an excellent transaction” for Fingerhut shareholders.

Already Ahead of the E-Commerce Curve

Since Fingerhut is already well-established as a mail-order business, the company is better positioned than many others to transition into e-commerce. Whereas traditional brick-and-mortar retail stores have to learn how to handle shipping and fulfillment issues for e-commerce, Fingerhut already operates an extensive range of back-end fulfillment services that make it a natural fit for e-commerce.

Beyond catalog and Internet selling, Fingerhut’s range of business services include telemarketing, direct marketing, information management, warehousing, product fulfillment and distribution, order and returns processing, and customer service.

In addition to its own e-commerce Web sites, Fingerhut also owns minority equity interests in four e-commerce companies — PC Flowers & Gifts, an online provider of flowers, gift baskets and gourmet food; The Zone Network, parent company of mountainzone.com; FreeShop.Com, an online provider of free merchandise and links to other e-commerce sites; and Roxy Systems, Inc., an Internet marketer of digital communications and entertainment services.

The core Fingerhut direct-mail catalog produces the majority of the company’s $2 billion annual sales. The company also operates catalogs under the names of Figi’s, a food and gift catalog; Arizona Mail Order and Bedford Fair, both apparel catalogs; and Popular Club, a membership-based general merchandise catalog.

Deal Details

In the transaction, Fingerhut shareholders will receive $25 per share in cash under a tender offer expected to commence within a week. The transaction value of approximately $1.7 billion includes net debt of Fingerhut, and is still pending, subject to regulatory approvals and other conditions.

The companies report that the financial impact of the acquisition will be “dilutive” initially. On a longer-term basis, Federated expects that the deal will accelerate its future growth and increase its return on investment.

Fingerhut will operate as a wholly owned subsidiary of Federated, with its headquarters remaining in Minneapolis, Minnesota. The company and its subsidiaries currently employ about 10,000 people.

Federated is one of the top department store retailers in the U.S., with annual sales close to $16 billion. The company operates more than 400 stores, including Bloomingdale’s, Macy’s, The Bon Marche, Burdines, Goldsmith’s, Lazarus, Rich’s and Stern’s.

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