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The Federal Trade Commission has until Dec. 27 to decide whether to expand its antitrust investigation into Kmart Holding Corp.’s acquisition of Sears, Roebuck and Co. or let the $11 billion deal close. The companies disclosed the deadline late Thursday in a preliminary proxy filed with the Securities and Exchange Commission. Sears and Kmart said they formally notified the antitrust agencies of the deal on Nov. 24. The mandatory waiting period for enforcers to issue a “second-request” for information on a transaction typically ends 30 days later. But federal law extends the waiting period when it falls on a holiday or weekend. In this case, the waiting period expires Dec. 24, which is a federal holiday. The next business day is Dec. 27. Kmart and Sears also said they need approval from Canada’s banking authorities because of Sears’ interest in Sears Canada Bank. And they noted that attorneys general in every state where they operate have a right to review the deal. “While we believe we will receive the regulatory approvals for the mergers, there can be no assurances regarding the timing of the approvals, our ability to obtain the approvals on satisfactory terms or the absence of litigation challenging such approvals,” the companies warned. Antitrust experts said it would be difficult to challenge the merger because the FTC historically defines retail sales markets narrowly. So instead of looking at competition among big-box discount stores, the agency will look at competition for shoes, appliances and other consumer product lines. Yet these same experts said the FTC may well decide to expand its investigation on Dec. 27 by issuing a second-request. The transaction involves so many geographic markets that enforcers may need more time to ensure that consumers will be protected. In the proxy, Sears and Kmart commit to use “reasonable best efforts” to win antitrust clearance. But they do not have to agree to any conditions that would result in a so-called material adverse effect on the combined company. Such a standard suggests that Kmart would have to agree to divest some stores if the FTC finds markets where Sears and Kmart are the only significant retailers offering specific types of products. Kmart and Sears said they expect to close the deal by the end of March. They also said the merger agreement gives either party the right to terminate the deal if it is not closed by June 1. If regulatory issues are responsible for the delay, the deadline is pushed back to Aug. 1. Sears must pay Kmart up to a $400 million termination fee for failing to use its reasonable best effort to win shareholder approval. Kmart would pay a $380 million termination fee for the same offense. That fee drops to $70 million if an alternative acquisition offer is on the table. But if the company terminating the deal executes another merger within 12 months, it must pay the rest of the full termination fee. The merger agreement includes a material adverse effect clause permitting either company to back out. Exempted from the clause are changes in the prevailing market conditions in the U.S. or elsewhere unless they have a disproportionate material effect on the two retailers. Also exempt is any effect resulting from the merger agreement or from the outbreak of major hostilities or a terrorist attack. Sears Holding Corp., the new name for the combined company, said that the deal would reduce its cash reserves. Assuming the merger closes in March, the company would have $1 billion of cash on hand and $5.8 billion of debt. “As a result, Holdings will be required to obtain additional financing to meet its liquidity needs,” it said. The companies also said that six lawsuits have been filed on behalf of investors alleging both boards’ breached their fiduciary duties by approving the merger. Three of the suits are in Delaware Chancery Court, two in New York Supreme Court and one in federal court in Illinois. “Each of Sears and Kmart intends to defend itself vigorously in respect to the claims asserted against it,” the companies said. Copyright �2004 TDD, LLC. All rights reserved.

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