Bon-Macy's parent to buy ailing rival in a $10 billion deal.

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Federated Department Stores, owner of Macy’s and Bloomingdale’s, agreed yesterday to buy May Department Stores for about $36 a share and may announce the deal this morning, said sources familiar with the matter.

A purchase at $36 a share would be a 1.8 percent premium over May’s closing price on Feb. 25. The deal, valued at about $10 billion, creates a U.S. department-store company with more than 1,600 stores and $31.2 billion in sales, second only to soon-to-be combined Kmart Holding and Sears, Roebuck & Co.

Federated is expected to convert May stores, which include Marshall Field’s and the Lord & Taylor chain, to the Macy’s name, as it has been doing with its regional chain stores such as The Bon Marché.

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It also is likely to add more upscale items to boost May’s sluggish sales.

The combined company will be able to reduce supply and advertising costs as department stores get squeezed between retailers such as discounter Wal-Mart Stores and upscale retailer Neiman Marcus Group.

“It’s all about scale,” said John Zielinski, who helps manage about $82.9 billion at Neuberger Berman, which owns Federated and May shares. “The more scale you can bring if you’re a buyer of goods, the better position you’re in to negotiate with vendors. Strategically it has some advantages.”

Shares of Cincinnati-based Federated fell 22 cents to $56.79 in Friday trading. Shares of St. Louis-based May, which also owns Marshall Field’s and Hecht’s, rose $1.25 to $35.35.

The Wall Street Journal reported the deal earlier yesterday.

Spokeswomen for the two companies didn’t immediately return calls for comment.

During about a month of negotiations, price was a sticking point, with May asking for more money than Federated was willing to pay. Federated Chief Executive Terry Lundgren said last week he wouldn’t overpay for acquisitions.

Department stores are consolidating to compete with discounters and luxury chains.

Federated has adjusted better to the rising competition. Sales at May stores open at least a year declined 2.4 percent last year, compared with a 2.6 percent gain at Federated.

“Where May has fallen flat, Federated management has executed, turning around same-store sales, improving margins and upscaling the assortment to drive ticket and compete less directly with moderate retailers,” wrote UBS analyst Linda Kristiansen, who rates May “neutral” and Federated a “buy.”

Federated is converting 423 regional chain stores to Macy’s by March and would likely rename some of May’s stores to take advantage of the respected Macy’s brand and lower advertising costs, said George Whalin, president of Retail Management Consultants.

Some analysts question the wisdom of the acquisition, saying department stores will continue to lose market share.

The merger comes about two years after Lundgren took over as CEO at Federated. He has boosted sales by expanding private brands such as INC International Concepts and Charter Club apparel and Tools of the Trade cookware, which tend to have higher margins.

“Federated management is superb, with a great plan focused on fashion for the value and new labels and designers,” said Deutsche Bank analyst Bill Dreher, who rates May and Federated shares “hold.” “The May department-store base would be better utilized by Federated. It would be a win for consumers.”

May’s nearly 500 department stores, such as Famous-Barr, Kaufmann’s and Filene’s, are mostly in the nation’s heartland. Federated’s more than 450 locations are mostly on the East and West coasts.