*Federated Will Buy Fingerhut for $1.7B

Retail giant Federated Department Stores Inc., Cincinnati, will become the No. 2 player in the direct mail catalog channel through its pending acquisition of catalog stalwart Fingerhut Cos. Inc., Minnetonka, MN.

The parent of Macy's, Bloomingdale's and other upscale department stores agreed yesterday to pay $25 per share, or about $1.5 billion in cash, for all of Fingerhut's common stock. Federated also will assume about $200 million in Fingerhut's debt, valuing the transaction at $1.7 billion. Both companies' boards have agreed to the terms, and a tender offer is expected to commence next week.

Federated, whose e-commerce and catalog businesses make up a tiny percentage of its $15.8 billion in annual sales, said it hoped to use Fingerhut's infrastructure for catalog and Internet-order fulfillment and its expertise at database management and direct marketing. All of Fingerhut's management is expected to remain in place.

Fingerhut president Will Lansing said the acquisition would allow the companies to leverage their respective strengths.

“They are one of the pre-eminent retailers in the world. They have deep resources and they are interested in expanding their nonstore retailing,” he said. “We represent all those things they are interested in doing.”

Lansing said the deal came together after Federated had discussed contracting Fingerhut's fulfillment and distribution division, Fingerhut Business Services, to provide support for Federated's nonstore sales operations, which include the Bloomingdale's By Mail and Macy's By Mail catalogs and respective Web sites. As the management teams got to know each other, Lansing said, they decided a merger may be in the best interests of both.

Analysts said the move reflects Federated's recognition of the growing importance of offering consumers new shopping alternatives.

“Overnight, they've become a 700-pound gorilla in a cage,” said catalog consultant Bill Dean of W.A. Dean & Associates, San Francisco. “A year ago, Federated had one DM option — Bloomingdale's By Mail. Now they've got Macy's By Mail and macys.com and have gone to second on the consumer side in direct mail catalogs behind JCPenney.”

Federated also could be expected to benefit from the disparate customer bases of the two companies, Dean said. “It broadens their market. It gives them a whole range of [new] customers.”

Fingerhut generates $2 billion in annual sales, primarily from its Fingerhut core Fingerhut-brand general merchandise catalog, which offers installment-payment options appealing to moderate-income consumers. The company has 25 different catalog brands, sends out 135 mailings each year and has a sophisticated database of 30 million households with an average annual income of $35,000. Federated has a database of 58 million accounts, from which it derives lists to mail 50 million Bloomingdale's By Mail catalogs a year. The Macy's By Mail catalog, which debuted in September, is expected to mail 25 times a year by 2001, a spokesman said.

Lansing said there are no immediate plans to cross-promote merchandise between the two company's Web sites and catalogs.

Fingerhut recently acquired two women's apparel catalogs, Bedford Fair and Arizona Mail Order, and also has acquired minority positions in several e-commerce operators, including a 40 percent stake in PC Flowers & Gifts Inc. and a 19.9 percent stake each in The Zone Network, FreeShop International Inc. and Roxy Systems Inc. Fingerhut operates several other Web sites, including www.fingerhut.com and www.thehut.com. Fingerhut's main Web site brings in $30 million in revenues a year, Lansing said.

In addition to broadening Fingerhut's customer base, Lansing said, Federated will give Fingerhut more capital to allow it to continue to pursue investments in other direct marketing companies.

“It will give us deeper resources to make the kind of investments we've been making and it gives us new brands to leverage,” he said. “In addition to providing the infrastructure behind those, we will also be working with them to extend their reach through database marketing efforts.”

Federated has 400 retail stores in 33 states, including The Bon Marche, Burdines, Goldsmith's, Lazarus, Rich's and Stern's.

In trading after yesterday's announcement, Fingerhut's shares went up 5 9/16, to $24 3/8, while shares in Federated slipped 2 13/16, to 39 11/16. Investors might have thought the deal was overpriced, according to one source, although Dean applauded Federated for its willingness to gain a rapid presence in the direct sales marketplace.

“Of course,” he said, “we won't really know whether or not it was a smart move for a couple of years.”

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