Kmart & Sears To Merge

Sears Press Release

Kmart Holding Corporation (NASDAQ:KMRT) and Sears, Roebuck and Co. (NYSE:S) announced today they have signed a definitive merger agreement that will combine Sears and Kmart into a major new retail company named Sears Holdings Corporation. Sears Holdings will be the US's third largest retailer, with approximately $55 billion in annual revenues, 2,350 full-line and off-mall stores, and 1,100 specialty retail stores.

The combined business will have a broader retail presence and improved scale through a national footprint of nearly 3,500 retail stores. The combined company will also benefit from improved operational efficiency in areas such as procurement, marketing, information technology and supply chain management.

Under the terms of the agreement, which was unanimously approved by both companies' boards of directors, Kmart shareholders will receive one share of new Sears Holdings common stock for each Kmart share. Sears, Roebuck shareholders will have the right to elect $50.00 in cash or 0.5 shares of Sears Holdings (valued at $50.61 based on yesterday's closing price of Kmart shares) for each Sears, Roebuck share. Shareholder elections will be prorated to ensure that in the aggregate 55 percent of Sears, Roebuck shares will be converted into Sears Holdings shares and 45 percent of Sears, Roebuck shares will be converted into cash. The current value of the transaction to Sears, Roebuck shareholders is approximately $11 billion. The transaction is expected to be tax-free to Kmart shareholders and tax-free to Sears, Roebuck shareholders to the extent they receive stock.

Edward S. Lampert, chairman of Kmart, will be the chairman of Sears Holdings. He will be joined in an Office of the Chairman by Alan J. Lacy, current chairman and chief executive officer of Sears, and Aylwin B. Lewis, current president and chief executive officer of Kmart.

Sears Holdings will act as the holding company for the Sears and Kmart businesses, which will continue to operate separately under their respective brand names.

Mr. Lampert said, "The combination of Kmart and Sears is extremely compelling for our customers, associates and shareholders 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. The merger will enable us to manage the businesses of Sears and Kmart to produce a higher return than either company could achieve on its own."

Mr. Lacy said, "The combination will greatly strengthen both the Sears and Kmart franchises by accelerating the Sears off-mall growth strategy and enhancing the brand portfolio of both companies. This will clearly be a win for both companies' customers while significantly enhancing value for all shareholders. We will have a total combined store base of nearly 3,500 stores and the leading service organization in the industry capable of a major expansion to serve the needs of existing Kmart and Sears customers."

Mr. Lewis said, "Kmart has made great progress over the past 18 months to strengthen the organization in terms of profitability and product offerings. We believe the combination of Kmart and Sears will create a true leader in the retail industry - both as a key part of local communities and as a national presence. Together, we will further enhance our capabilities to better serve customers by improving in-store execution and ultimately transforming the customer's in-store experience."

The combination of the two companies is conservatively estimated to generate $500 million of annualized cost and revenue synergies to be fully realized by the end of the third year after closing. The company expects to achieve annual cost savings of over $300 million principally through improved merchandising and non-merchandising purchasing scale as well as improved supply chain, administrative and other operational efficiencies.

The merger, which is expected to close by the end of March 2005, is subject to approval by Kmart and Sears shareholders, regulatory approvals and customary closing conditions. Lehman Brothers served as financial advisor to Kmart, and Simpson Thacher & Bartlett LLP provided legal counsel to Kmart. Morgan Stanley served as financial advisor to Sears, and Wachtell, Lipton, Rosen & Katz provided legal counsel to Sears.