As approved by both firms' boards of directors, Kmart shareholders will receive one share of Sears Holding common stock, valued at $50.61 by the company as of Tuesday, for each share of Kmart stock. Sears shareholders will have a choice of either $50 in cash per share or 0.5 share of Sears Holding.
The joint press release valued the transaction at $11 billion. It must be approved by shareholders.
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Sears has been failing for nearly four years, to the extent that investors were considering dismantling it for the underlying value of Sears real estate.
Sears same-store sales declined in 13 of the past 15 quarters. Revenue fell 15 percent in the third quarter to $8.29 billion, the largest drop in more than eight years and the third straight quarter the decline exceeded 10 percent.
Kmart emerged from bankruptcy in May 2003 after a damaging move into specialty retailing. Kmart reported profit of $155 million in the fiscal second quarter after holding fewer clearance sales and closing stores, according to the Bloomberg news service. It was Kmart's third straight profit following 11 consecutive quarters of losses. Same-store sales have fallen 12 straight quarters.
Sears had already purchased some Kmart properties.
The announcement this morning noted that the new Sears Holdings will combine Sears's "powerful" franchises in tools, appliances, lawn and garden equipment with Kmart's proprietary home and fashion lines, including Thalia Sodi, Jaclyn Smith, Martha Stewart Everyday and Sesame Street.
Company officials claimed that the combined companies will generate $500 million in annual "synergies," or cost savings, within three years, through cross-selling brands, converting Kmart stores to the Sears nameplate, improving the supply chain and selling off "non-strategic" real estate assets "as appropriate."
The announcement said a new "Office of the Chairman" would be created in which various current executives would assume new roles. Lampert will be the chairman of Sears Holdings. Alan J. Lacy, current chairman and chief executive officer of Sears, will be vice chairman and chief executive officer of the new entity.
"The combination of Kmart and Sears is extremely compelling for our customers, associates and shareholders," Lambert said in a statement, "as it will create a powerful leader in the retail industry, with greatly expanded points of distribution, leading proprietary home and apparel brands and significant opportunities for improved scale and operating efficiencies."