Shares of Broadway Stores Inc. more than doubled Tuesday in the first trading since Federated Department Stores Inc. said it would buy the debt-burdened chain. Federated stock slumped.
The purchase, expected to be completed by the end of October, would strengthen the California presence of Federated, parent of the Macy’s and Bloomingdale’s stores and already the leading department store company in the country. But the deal would add to the number of Federated shares outstanding, diluting the holdings of existing stockholders.
In trading Tuesday on the New York Stock Exchange, Broadway shot up almost 148 percent, or by $4.25 to close at $7.12-1/2 a share, while Federated fell $1.50 or 5.1 percent to $28 a share.
The acquisition was announced after the close of markets Monday.
Federated said it would issue stock, currently valued at approximately $550 million, in a swap for all of Broadway’s shares and $200 million of Broadway’s $1.25 billion in debt.
Of the remaining Broadway debt, Federated expects to eventually recover $575 million, spokeswoman Carol Sanger said Tuesday. That brings the net value of the deal to approximately $1.02 billion.
An analyst attributed the decline in Federated shares to investor concern that the takeover would modestly dilute their holdings. “People have been looking for an excuse to take some profits in Federated,” said Jeffrey Edelman, an analyst who follows Federated for C.J. Lawrence/Deutsche Bank Securities Corp. in New York.
Edelman said the takeover is positive for Federated.
“What they’re doing is acquiring some very good real estate at the cost of building new locations. But the locations are superb,” he said.
Edelman said the deal provides Bloomingdale’s with a long-sought entry into California while expanding Macy’s store space in the West by about 50 percent.
In addition, Federated gets rid of a weak competitor whose pricecutting was “destroying the market,” he said.