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Mitsukoshi, Isetan in Talks, May Seek Merger

Japanese department stores Mitsukoshi and Isetan are in talks on a capital alliance and may seek a merger, a source familiar with the matter told Reuters on Wednesday.

A potential combination which would create Japan's biggest department store operator with annual sales of 1.6 trillion yen (US$13.3 billion) sent shares in Mitsukoshi, the weaker of the two, soaring 7% while Isetan shares edged 1% higher.

Shinko Securities analyst Jun Kawahara said a deal would make sense for both companies. "They target a different type of customer and so their businesses would not overlap," he said.

According to the source, Mitsukoshi, the nation's fourth-largest department store operator which has been suffering from slow sales in recent years, initiated the talks with Isetan, which is the fifth-largest.

A merger would be the latest in the industry, which has seen its market contract for nine straight years through 2006 hit by growing competition with large suburban shopping malls and by deflation.

Daimaru and Matsuzakaya Holdings earlier this year agreed to a merger while Hanshin Department Store and Hankyu Department Stores are set to merge in October.

Mitsukoshi and Isetan both said in statements that nothing had been decided. Mitsukoshi operates 15 stores while Isetan has 7 Isetan-brand stores and others operated by units.

Mitsukoshi, once the leader of the retail industry, closed down four stores in 2005. It posted a 62% decline in first quarter operating profit on a 5% fall in sales.

By contrast, Isetan, known for its strength in apparel lines, has been enjoying solid growth thanks to strong sales at its flagship store in Tokyo.