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Daimaru Considers Integration With Matsuzkaya

Daimaru said that it is considering a business integration with Matsuzakaya Holdings in a
deal that would create Japan's largest department store group.

A spokesman for Daimaru, which ranks fourth in Japan's department store industry, said that joining up with eighth-ranked Matsuzakaya was one step it was looking at to help it cope with tough competition in a shrinking market.

Daimaru and Matsuzaka would together have sales of about 1.17 trillion yen ($9.8 billion), surpassing current leader Takashimaya's 1.03 trillion yen, as well as No. 2 and No. 3 ranked Millennium Retailing and Mitsukoshi.

"There used to be around 200 department store companies in the United States and that has since been whittled down to 17 or 18 groups. There are still 100 or so in Japan," said Daimaru spokesman Yasuhide Matsuo. "The industry is in an era of consolidation and realignment, and the integration (with Matsuzakaya) is one thing we are considering," he said.

His comments came in response to a Nikkei newspaper report that Daimaru and Matsuzakaya were negotiating over an integration that would include joint purchasing and distribution. The paper said the two firms were hammering out details.

Matsuo described Daimaru's study of a possible deal with Matsuzakaya as being at an early stage and said that nothing had been decided. Matsuzakaya spokesman Shunrou Yamakawa said his company was not considering merging operations with Daimaru.

A combination of Daimaru and Matsuzakaya would be the first major industry realignment since 2003, when Seibu Department Store and Sogo joined up to create Millennium, which is now part of the Seven & I Holdings retail group.

Among other moves, seventh-ranked Hankyu Department Stores and No. 15 Hanshin Department Store are discussing an alliance as a first step towards an eventual merger, and will unveil their plans in March, the Nikkei said.

Shrinking Market

The market has been shrinking amid growing competition with large suburban shopping malls. Industry sales fell 0.7% to 7.77 trillion yen in 2006, the ninth straight year of decline, according to the Japan Department Store Association.

News of the possible alliance will likely lift shares of Daimaru and Matsuzakaya on Monday. It may also spark buying in other department store operators on speculation that industry consolidation will gather pace, one stock dealer said.

"For Daimaru and Matsuzakaya this will be seen as good news as it would allow them to get rid of some of the waste and become more efficient," said Ken Masuda, senior dealer at Shinko Securities, adding that among others in the sector buying would likely focus on the smaller and weaker players. "The thinking here is they may do the same thing to survive."

Geographically there would not be much overlap between Daimaru and Matsuzakaya.

Daimura was founded in 1717 and is based in the western city of Osaka. It has 16 stores. Only one is in Tokyo and most of the rest are in western and southern Japan. It posted group sales of 822 billion yen in the business year ended Feb. 2006.

Matsuzakaya's history dates back to 1611. Of its nine stores, four are in its home prefecture of Aichi. The retailer had annual revenues of about 344 billion yen in 2005/06.

A fund led by now-disgraced financier Yoshiaki Murakami took a big stake in Matsuzakaya last year and urged the company to conduct a management buyout. Since then Matsuzakaya has adopted an anti-takeover defense scheme to ward off unwanted suitors.

The Nikkei said the alliance with Daimaru could serve as protection against a hostile takeover. Matsuzakaya has some prime real estate holdings, including sites in the upmarket Ginza district, that might be attractive to an investment fund.

Matsuzakaya is also keen to find ways to cut costs given the heavy financial burden to remodel its Ginza outlet.

Daimaru is bracing for tougher competition in its home ground of Osaka with Mitsukoshi preparing to open a new outlet there and Hankyu renovating its flagship store in the Umeda area, the Nikkei said.