The $11 billion merger announced today between two troubled retailers — Sears and Kmart — illustrates just how valuable real estate has become. Kmart has bailed itself out of bankruptcy and run its stock to more than $100 per share based partly on its ability to sell off its non-core assets for huge returns on the underlying real estate.

Recent analyst estimates peg the value of both companies’ real estate higher than the value of the companies’ stock. According to a recent report by Deutsche Bank REIT analyst Lou Taylor, Kmart’s real estate alone is worth up to $152.95 per share and Sears is worth up to $55.38 per share.

The bottom line is that even if lofty plans by Edward Lampert — widely regarded as the engineer behind today’s merger between Kmart Holding Corp. and Sears Roebuck and Co. — fail he’s still sitting on a mountain of valuable real estate at his disposal. Lampert, who owns more than 50% of Kmart stock and about 14% of Sears, will serve as chairman of the newly merged entity.

Today’s blockbuster deal will result in the creation of Sears Holdings Corp., an entity with $55 billion in annual revenues, 2,353 full-line stores and 1,100 retail stores. Sears Chairman and CEO Alan Lacy will become vice chairman and CEO of Sears Holdings. Kmart President and CEO Aylwin Lewis will lead Sears Retail as president and CEO.

The merger strategy takes dead aim at Wal-Mart’s ever-growing dominance in the retail sector. The newly combined Sears and Kmart entity makes it the third-largest retailer with $60.8 billion in sales this year compared with Wal-Mart’s $256.3 billion in sales.

In a conference call with investors and reporters today, Lacy noted that Sears’ store base has not changed in 30 years, while big boxes such as Wal-Mart have proliferated. "Over the past three decades we have not grown our store base to a great degree. But at the same time, the big-box competitors are adding 700 to 800 stores a year," Lacy says. Sears has 60 stores in its pipeline today — the most in its history. "Yet it’s not enough," Lacy said.

Lampert emphasized that Sears’ experience, services and products are every bit as good as its competition. "The problem is that it isn’t where its customers are. There’s a pretty substantial opportunity here to bring the Sears experience and product where the Best Buys, Targets and Home Depots are. That’s where [Kmart is]. Put Sears in a Kmart box and it should do very, very well."

Some analysts agree. "It’s a deal made in heaven. It will guarantee a new lease on life for both companies, and it will shake up the entire competitive picture," says Kurt Barnard, president of Barnard’s Retail Consulting Group. "It is partly a challenge to Wal-Mart. Wal-Mart will now have to refocus its competitive strategies."

The retail strategy calls for the two chains to retain their current banners, but it will enable them to share brands. Sears will sell Martha Stewart products, for example, while Kmart gains access to Kenmore and Craftsman, Sears’ heavyweight brands.

The merger will have several potential effects on developers and owners. For one, the new management team already is discussing converting several hundred Kmart locations into Sears stores. Earlier this year, Sears bought the ownership or leasehold interests of 50 stores from Kmart for $575.9 million.

That strategy plays right into Sears’ attempts to grow its off-mall base of stores. Access to Kmart real estate also will give Sears an opportunity to more aggressively expand its Sears Grand stores, a superstore concept. Sears just opened its fourth Sears Grand store nationally and plans to open eight to 10 more by the end of 2005. But converting Kmart real estate into Sears stores enables it to accelerate that process.

According to the terms of the merger, shareholders of both companies will exchange their stock for new shares of Sears Holdings. Sears shareholders will have the right to accept $50 in cash or 0.5 shares of Sears Holdings. Kmart shareholders will receive one share of new Sears Holdings common stock for each of their shares. However, the agreement stipulates that only 55% of Sears stock can be converted to stock in the new company. The rest must be converted into cash.