Macy's group in $11bn bid for retail rival

The US department store group behind Macy's and Bloomingdale's is buying a major rival for $11bn (£5.7bn). The deal brings together some of America's best known high-street chains into a company with almost 1,000 stores across the country.

Federated Department Stores is acquiring May Department Stores in a cash and shares deal which will create a national giant with a presence in almost every major city across the US and about $30bn in annual sales.

The move comes after both companies have suffered from waning sales, which have been squeezed by the mammoth low-cost retailer Wal-Mart at the discount end of the market and by prestigious chains such as Neiman Marcus in the luxury market.

Terry Lundgren, the chief executive of Federated and a 30-year veteran of retailing, will head the enlarged group. "Federated will have 15 new states added by this deal, most in the heartland of America. Federated will now have coast-to-coast coverage and will be a national retailer in the true sense of the word," Mr Lundgren said.

The deal was thrashed out over the weekend. There was speculation about which of the two companies' host of brands would survive the merger. The Missouri-based May's well-known names such as Lord & Taylor and Marshall Field's are expected to go untouched. But its more regional brands are expected to be reinvented as Macy's stores over several years.

Federated said it expected to generate cost savings of $450m and add to Federated's earnings by 2007. The companies have held on-and-off merger talks for years but until recently a major sticking point was how the top jobs would be divided up. That problem was solved when May's chief executive, Gene Kahn, was ousted by the board last month, prompting the company's shares to soar on renewed expectation of a deal.

Analysts said the scale of the tie-up, which will probably leave consumers in some areas with no alternative department stores to go to, could prompt concern by competition authorities. Mr Lundgren emphasised there was little overlap between the two companies' different chains, and said the "ultimate winner" in the deal would be the customer.

Other retailers are also feeling the pinch from intense competition, prompting consolidation elsewhere in the sector. At the end of last year Kmart unveiled plans to buy Sears Roebuck for $11.5bn and other deals are expected.

Federated, based in Ohio, will pay May shareholders $17.75 in cash and 0.3115 Federated shares for each May share. This values May shares at about $35.50 per share. Federated will also assume $6bn in May debt.