Sogo Co. President Shigeaki Wada announced Friday that the department store chain will merge its operations with those of Seibu Department Ltd., its bankruptcy-rehabilitation sponsor suddenly experiencing its own difficulties.

The announcement came a day after Sogo, which filed for bankruptcy with staggering debts of 1.87 trillion yen in July 2000, was given court approval to emerge from rehabilitation.

According to Wada, the two department store chains are likely to keep their names under a holding company that will be established, possibly in June.

“We will create some fruitful union without completely merging two department store chains,” Wada said.

“The holding company structure can make it possible for each brand to keep their unique elements and maintain customer satisfaction.”

Although a merger has been the focus of considerable speculation, this is the first time that the consolidation plan has been referred to in specific terms by management.

The companies have been involved in a wide-ranging operational alliance since early last year. Wada, the former president of Seibu Department Stores, was invited to steer the bankrupt Sogo out of its difficulties.

He has now been asked to return as president of Seibu, a chain he turned around in the early 1990s.

Although Seibu’s rehabilitation plan has not yet been approved by creditors, Wada said a consolidation with Sogo is inevitable.

Seibu is currently seeking a 230 billion yen bailout from major creditors as it strives to extricate itself from massive losses incurred by its group companies.

Wada also noted that Sogo is ready to provide its now-struggling partner with a capital injection of 5 billion yen, saying this is possible given its “ample cash flow.”

Sogo’s surprisingly quick emergence from its rehabilitation program was described as “unprecedented” by court-appointed supervisor Hideki Matsushima.

It was achieved via radical streamlining of the bloated group under the command of Wada, who believed the chain’s brand name would suffer further if the rehabilitation process dragged on.

“I have been well aware of the criticisms that (the restructuring efforts) were severe, cruel or just too much, but speed is very important for revival,” he said.

In the wake of its bankruptcy, Sogo closed down nine unprofitable outlets. In addition, it will have cut two-thirds of its workforce, to around 3,300, by the end of February.

It also sold and liquidated more than 150 group companies, both at home and abroad.

It also received an influx of executive talent from Seibu and cooperated with its rehab sponsor in procurement, distribution and merchandising.

Due to rigorous cost-cutting efforts, the chain managed to report an operational profit two years ahead of schedule — 1 billion yen for the business year ending in February 2002.

The firm expects an operating profit of just over 6 billion yen on revenue of 454 billion yen for the current business year.

It expects its operating profit to grow to 12.5 billion yen in the 2005 business year, with the percentage of operating profit against sales reaching 2.6 percent. This should make the chain among the most profitable in the industry, according to Wada.

Sogo also announced it will open a new store in downtown Osaka in the fall of 2005.

The store, which will be built on the premises of its former Osaka outlet and have floor space of 62,000 sq. meters, will be a symbol of Sogo’s revival, Wada said.

While Wada said he was relieved with the end of the rehab process, many observers view Sogo’s recovery as an aberration within the industry, describing the firm as a zombie that came back to life only because of a 1.5 trillion yen debt waiver.

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