Campeau Suffers Setback in Bid for Federated : Judge Rules in Favor of Proviso That Gives Rival Bidder Macy’s an Edge

Campeau Corp.’s bid for Federated Department Stores took a stinging blow in federal court Friday.

A federal judge upheld a key element of Federated’s anti-takeover plan in a decision that could kill the Canadian developer’s hopes of taking over the retailer, which owns Ralphs supermarkets and Bullock’s department stores.

The ruling dramatically improves the chances of rival bidder R. H. Macy & Co., whose $6.3-billion offer has the blessing of Federated. As a result, Federated is not expected to use its anti-takeover weapons against Macy’s.

Campeau had said Federated’s anti-takeover moves would make a takeover too expensive, and the company’s lawyer said Friday that an appeal of the judge’s ruling is likely.

‘Major Blow’

“We will have to win at some point on this issue,” said attorney Frederick A. O. Schwarz Jr. after hearing the ruling by U.S. District Judge Leonard Sand.

If the judge is upheld, “Federated would most likely belong to Macy’s,” said retail analyst Monroe Greenstein at Bear, Stearns & Co.

Many arbitragers and others who hold Federated shares were waiting for Judge Sand’s ruling before deciding between Campeau or Macy’s. But some analysts believe that more is to come. “It’s a major blow to Campeau, but I don’t think it ultimately settles it,” said William N. Smith, a retail analyst with Smith Barney, Harris Upham & Co.

Judge Sand’s ruling upheld Federated’s so-called “poison pill”--a key weapon that companies often use to thwart unwanted takeovers.

In this case, the Federated board of directors had approved a provision that gives stockholders the right to buy shares of Federated at half price under certain circumstances during a takeover battle. The idea is to make the purchase of Federated as expensive as possible in the event of a hostile takeover.

Would Add Costs

The complicated plan would, for example, give an individual who owns one share of Federated stock the right to buy an additional $250 worth of the stock at half price.

“You’ve got a very powerful device--sort of like a nuclear bomb,” noted analyst Smith.

In fact, such a plan would add as much as $11 billion to the cost of buying Federated, and Campeau went to court to get the plan killed.

In arguing to block this poison pill, Campeau said Federated’s board had breached its fiduciary duty by threatening to put the plan into use.

Despite Campeau’s complaints, Judge Sand said the poison pill was a “reasonable response” to a threat perceived by Federated’s board. Furthermore, he said, the board was “clearly empowered” to use such measures against coercive offers.

The judge said he would continue to monitor the bidding for Federated and warned that he might intervene if Federated did not properly consider higher bids that might come later.

Bid Extended

There was some good news for Campeau in the judge’s rulings. Macy’s had asked the court to rule that Campeau had acted improperly when it changed its bid and raised the amount it was offering for Federated. Macy’s argued that Campeau should have to start over with a new bid.

A new bid needs a minimum of 20 business days before it expires versus only 10 days under an amended bid. Analysts say that the delay caused by a new bid would take the pressure off Federated shareholders.

The judge also extended Campeau’s bid--set to expire March 22--to March 25.

Hearing Within Week

The bid was extended to give the SEC time to decide if Campeau needs to provide more detailed information about the financing of its takeover bid. If more information is required, the SEC has said Campeau would have to hold its bid open at least another five days.

Sand said he expected to hold a hearing sometime within the week to review the SEC’s opinion on whether Campeau should provide more detailed financial information about its bid.

Under its current bid, Campeau would pay $75 a share for 80% of Federated shares and $44 for the remaining 20%. Macy’s is offering $77.35 a share in cash for 80% of Federated shares. The remaining shares would be swapped for shares in the company formed by the merger of Macy’s and Federated.

Jesus Sanchez reported from Los Angeles and Paul Richter from New York.