Macy's Into Sears Holdings?

Sears Holdings (SHLD) shares jumped over $5.68 Friday as rumors bounced around that Lampert may be getting ready to use some of the $4 billion plus he has sitting around in Sears coffers. Analysts said Macy's (M) investors seemed to be positioning for a possible merger, reflected by a sharp rise in the department store's options call volume as rumors of a deal percolated.

"There is some renewed takeover speculation in Macy's heading into the weekend. Therefore, investors are buying shares and some options in case something happens," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.

"The latest chatter today in dealing rooms is that super-investor Eddie Lampert may be looking to tie Macy's and Sears Holdings together," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group, in an e-mailed report.

Shares of Macy's, that had been trading 15% below their YTD high have jumped on the rumors. Does the deal make sense? Hell yes. With a value of about 1/2 Sears Holdings, Macy's would fit perfectly under the Sears umbrella. Not only that, the folks currently running things at Macy's, who have have done a wonderful job the last 4 years with the Macy's brand, could offer Lampert's team assistance in revitalizing both Sears and Kmart. Macy's has had problems with it's May's chain acquired in 2005 and I would be willing to bet if Lampert bought Macy's, May's would be gutted and sold to provide operating cash. How much? Consider Macy's converted more than 400 former May's locations to its namesake chain in September, about a year after buying the rival for $11 billion. The retailer owns more than half of its 858 Macy's and Bloomingdale's stores. The rest the company leases or owns on leased land. That would give Lampert a plethora of options the finance the deal and make it accredive to earnings almost immediately.

But, this is not the true "valueplay" Lampert has become known for and Macy's is not currently selling at a bargain. Consider also that it only sits on only $500 million in cash and over $9 billion in debt. This alone would force Lampert to sell huge chunks of real estate to pay down existing debt and any debt added in the acquisition. Macy's has repurchased over $3 billion in stock the last 28 weeks but has added $1.5 billion in debt doing so. Losing the dividend would save Lampert another $275 million a year and help reduce debt.

Should we root for this? Yes. If Lampert goes for it, he is seeing value in the assets and name far in excess of the current price. The plus of having Lampert buy it? He will have the ability to quickly extract that value for shareholders, of which, we must always remember, he will be the largest one.

If he doesn't and this is all just another baseless rumor, oh well, the exercise was fun in an otherwise painfully monotonous news summer to date.

Did anyone hear anything about some new phone?