When Vornado Realty Trust announced in November it had acquired 4.3% of Sears, many observers concluded that the Paramus, N.J.-based real estate investment trust (REIT) wanted to wrest control of the venerable but struggling retailer. Those plans may have been disconcerting to major Sears stockholders, who weeks later revealed their own $11 billion plan to sell Sears to Kmart. If approved by the U.S. Federal Trade Commission, the new entity would become the nation's third-largest retailer.

The pending merger between Kmart Holding Corp. and Sears, Roebuck & Co. is clearly an attempt to boost the fortunes of two flagging retail chains. What's less clear is why Vornado would consider buying Sears. Does it want to get into the business of selling Craftsman power tools or Kenmore washer-dryers? “Many retail pundits believe that a number of retailers may be worth more dead than alive,” by dint of their real estate, according to analyst Jonathan Litt of Smith Barney.

In a December research note, Litt wrote that “Vornado could still team up with a private equity partner or another retailer to bid for Sears, and/or another dark horse bidder may still emerge.” In other words, it's not a done deal just yet.

That is not the vision of Edward Lampert, the investor who is a driving force behind the merger between Kmart and Sears. Lampert, who controls 50% of Kmart and 14% of Sears, foresees a company that earns $55 billion in annual revenue. Both Sears and Kmart brands would survive the merger, although analysts believe fully one-third of Kmart's existing stores would be converted to Sears or sold. Many of Sears' mall locations, meanwhile, could “attract natural buyers like Target or be reclaimed by developers” seeking to convert the anchor spaces into power centers, according to Prudential Equity Group LLC.

Vornado, an integrated REIT with $16 billion in combined debt, equity and preferred equity, owns 87 million sq. ft. of office, retail and merchandise-mart properties. While the company isn't talking, several analysts such as Litt speculate that Sears' real estate — by itself worth between $8 billion and $10 billion — is the chief attraction. He estimates that Sears owns about 60% of its stores and leases the remaining 40%.

Last year, in fact, Vornado attempted to acquire Mervyn's, the department store that eventually sold for $1.7 billion to a group led by Sun Capital Partners Inc. of Boca Raton, Fla. That group is “looking to unlock the value of the retailer's real estate,” according to Litt.

While it's not unusual for a company to make a play for a retailer's real estate, that historically has occurred only after a retailer has gone bankrupt, says Howard Makler, chairman of Excess Space Retail Services in Orange County, Calif. “Now, people are talking about buying the real estate of companies that are still in business. That's never been done before.”

Most observers believe that a Sears-Kmart merger is far more likely than a Vornado takeover. The value of the real estate may give Lampert and his fellow stockholders added reason to feel secure. If the merger is not a successful marriage, investors still would own some valuable real estate, according to Alan Clifton, director of leasing and disposition for Passco, an Irvine, Calif.-based owner and operator of regional malls. “How many times,” Clifton adds, “can you get into a merger deal in which your fall-back position may be as good, if not better, than your initial reason for merging?”

Reader Survey: How would the proposed Kmart and Sears merger impact the real estate industry?

What type of real estate will the Sears-Kmart merger help most?
Power Centers: 48.3%
Community Centers 32.6%
Regional Malls 16.7%
No Answer 2.4%


What type of real estate will it hurt the most?
Regional Malls 55.1%
Community Centers 23.5%
Power Centers 15.6%
No Answer 5.8%


Who is likely to be hurt most by the merger?
JC Penney 28.2%
Don't Know 15.0%
Sears 14.6%
Wal-Mart 12.3%
Target 12.3%
Kohl's 5.8%
Kmart 4.4%
Other 3.7%
No Answer 3.7%


Do you agree or disagree with the following statement: I would expect further consolidation in the department-store business.
Agree 74.8%
No Answer 9.5%
Don't Know 8.2%
Disagree 7.5%


National Real Estate Investor and sister publication Retail Traffic surveyed readers in the days following Kmart's acquisition of Sears. About 300 people responded; 73.5 percent of were real estate executives.