* Cancels merger announced in Oct 2008 over ratio, strategy
* Takashimaya says not seeking new partner, to focus on Asia
* Both firms say to keep 10 pct stakes in each other
* Japan dept store market has shrunk by 1/3 in past 20 yrs
* Would have been good combo, market overcrowded-analyst
(Adds Takashimaya, analyst comment, background)
By Taiga Uranaka
TOKYO, March 25 Japanese department stores
Takashimaya (8233.T) and H2O Retailing (8242.T) cancelled plans
to merge on Thursday due to differences over the merger ratio and
strategy to cope in the rapidly shrinking market.
Takashimaya and H2O had agreed in October 2008 to merge their
operations within three years, creating a company roughly as
large as industry leader Isetan Mitsukoshi (3099.T), and had
taken stakes of 10 percent in each other to cement their ties.
The dissolution of the merger will force both firms to forge
a new strategy to survive a market that has shrunk by a third in
the past two decades, hit by a sluggish economy and competition
from budget chains and suburban shopping malls.
The combination of Takashimaya and H2O would have marked the
third major merger in the department store industry following
recent deals to create Isetan Mitsukoshi and No. 2-ranked J.Front
Takashimaya has 20 stores in Japan and three overseas. It has
major stores in Yokohama and Tokyo, while H2O's operations are
focused on the western city of Osaka.
"It would have been a good combination, since Takashimaya and
H2O have few store overlaps geographically," said Shun Tanaka,
chief analyst at SMBC Friend Research Center.
"There are too many Japanese department stores. Store floor
space has not decreased even while sales have plummeted."
Takashimaya President Koji Suzuki said the two companies
could not agree on merchandising and other strategies to tackle
the tough business environment. They also failed to reach a
consensus on the merger ratio, Suzuki said.
Takashimaya has a market value of about $2.6 billion, roughly
double that of H20, which runs the Hanshin and Hankyu department
Takashimaya said it would close its loss-making store on New
York City's Fifth Avenue as part of a shift in focus to Asia. It
already has stores in Taiwan and Singapore and plans to open one
in Shanghai in 2012.
Suzuki said the company was not considering any store
closures in Japan and would not seek a new merger partner.
"Scale is not neccessarily a strength for a department store
operator," Suzuki told a news conference on Thursday.
Since peaking at 9.7 trillion yen ($105.3 billion) in 1991,
Japan's department store sales have declined steadily to 6.6
trillion yen last year, reflecting customer flight to clothing
chains like budget fashion retailer Uniqlo (9983.T).
The industry's woes have been exacerbated by the global
economic downturn, with major chains suffering double-digit sales
fall for months.
Takashimaya and H2O both said they planned to keep their
stakes in each other and operational ties, which include
collaboration in procurement and marketing.
"We have reached a conclusion that it's better to develop
operational alliances in areas beneficial to both than to rush
into a half-baked merger," H2O Retailing CEO Shunichi Sugioka
told a seperate news conference.
Prior to the announcement, shares of Takashimaya closed down
0.8 percent at 719 yen, while H20 fell 0.8 percent to 618 yen.
The benchmark Nikkei average .N225 gained 0.1 percent.
(Additional reporting by Nobuhiro Kubo and Yumi Horie)