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Two prominent U.S. senators demanded Wednesday that the Federal Trade Commission scrutinize Kmart Holding Corp.’s $11 billion acquisition of Sears, Roebuck and Co. “This merger will impact millions of consumers across the nation who shop daily at these two chains for their household needs,” said Sens. Michael DeWine and Herb Kohl, respectively the chairman and ranking member of the Senate Judiciary antitrust subcommittee. “We will monitor this situation carefully to ensure that consumers do not suffer a significant loss of competitive choices as a result of this deal.” Antitrust experts predicted the FTC will heed the call of DeWine, R-Ohio, and Kohl, D-Wis., and thoroughly investigate the deal, which would create the country’s third-largest retailer. But they said the transaction should eventually pass muster. “Given the size of the deal, I’m sure someone will be assigned to think about it,” said Marc Schildkraut, a partner at law firm Howrey Simon Arnold & White in Washington. “But I think it is plausible, if not probable, that there won’t be a second request” for more information on the deal. An FTC spokesman declined to comment. Kmart said it expects to close the deal by the end of March, which suggests that it does not anticipate serious antitrust objections from the government. Antitrust lawyers said the FTC will not define a broad market for department or discount stores in reviewing the deal. Rather, it will focus on whether Kmart and Sears sell lines of products that consumers cannot find elsewhere. “The federal government looks at these on a product-by-product market,” one antitrust expert said. “Department stores are not a separate market because you can buy shoes at many different stores.” The two chains also have different formats, said Marimichael Skubel, a partner at law firm Kirkland & Ellis in Washington. Sears has many stores serving as anchors for enclosed malls, while Kmart outlets are more likely to be found in strip malls. “They are in different niches,” she said. “I can’t see it being a problem.” Despite the overall positive antitrust feedback on the deal, several lawyers cautioned that business has been caught by surprise several times in the past decade on retail mergers. Most notable was May Department Stores Co.’s purchase of the McCurdy & Co. department store chain in Rochester, N.Y. The FTC opted to let the 1994 deal proceed unchallenged, and May closed the deal. But Bon-Ton Stores Inc. and the Office of the New York State Attorney General sued in federal court for a preliminary injunction to force May to undo the deal pending a full trial on whether the transaction violated antitrust law. Schildkraut, who represented Bon-Ton, said the company argued that there are certain items such as high-end cosmetics that a consumer can purchase only at a department store. By allowing May to own all of the department stores in Rochester, it could profitably raise prices on these unique items. U.S. District Judge David G. Larimer bought the argument, ordering May in 1995 to undo the deal pending a trial on the merits. That second trial never occurred because May settled by selling the stores to Bon-Ton. The May-McCurdy case takes on added significance for Kmart-Sears because the lead lawyer for New York was Pamela Jones Harbour, who is now an FTC commissioner. She will have influence over how the agency evaluates the deal. The other big case to catch the antitrust establishment off-guard was the FTC’s challenge to Staples Inc.’s acquisition of Office Depot Inc. The agency successfully blocked the merger after proving there was a distinct market for office-supply superstores. “No one thought Staples-Office Depot would be a problem,” Schildkraut said. “It was the econometrics and internal documents that showed it was a problem.” For Kmart-Sears to encounter similar difficulty, antitrust enforcers would have to find something about their pricing or product line that is not duplicated elsewhere. “You want something limited in its distribution so consumers could not go elsewhere in the mall to find it,” Schildkraut said. Michael L. Keeley, a partner at Axinn, Veltrop & Harkrider in New York, said he sees almost no chance of the FTC completely halting the merger, because that would require the agency to define a national market for retail sales. Viewed so broadly, the merger would be unlikely to harm competition, he said. Wal-Mart Stores Inc., Target Corp. and many other retailers compete against the two chains. The FTC is more likely to outline a narrow geographic market, he said. That eliminates the threat that the entire deal could be stopped but raises the risk that the FTC could require the sale of a few overlapping stores, he said. This would be in communities where Sears and Kmart are the only two retail options for specific products. “This is almost like supermarkets,” Keeley said. “You are looking at very local markets.” Kmart has retained Simpson Thacher & Bartlett’s Joseph Tringali and Kevin Arquit to handle the antitrust review. Sears has hired David Neill of Wachtell, Lipton, Rosen & Katz. Copyright �2004 TDD, LLC. All rights reserved.

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