NEW YORK — Ending an unhappy chapter in its history, Mobil Corp. said Monday that it has agreed to sell its resurgent Montgomery Ward department store chain to a Ward management group for $3.8 billion.
Mobil, which for years was drained by Ward losses, said a group led by Ward Chairman and Chief Executive Bernard F. Brennan will pay $1.5 billion in cash and assume an additional $2.3 billion in debt for the 115-year-old chain. Ward executives will own about 15% of the new company, Brennan said.
Playing a key role in the leveraged buyout is General Electric Co., which will finance the transaction through its General Electric Capital Corp. unit and buy Ward's lucrative private credit-card operation. As part of the deal General Electric is also buying a stake of an undisclosed size in Ward, which is the nation's ninth-largest retailer.
In an interview, Mobil Chairman Allen E. Murray said the sale gave "a very good price to us and a good opportunity for a company that has proven it can stand on its own. . . . People scoffed at us for hanging onto the company, but in the end it worked out."
The Ward purchase has been called the worst strategic mistake Mobil ever made. Mobil bought the retailer in 1974, during the height of the first oil crunch, and was sharply criticized for failing to spend the capital instead to find for new oil reserves. Mobil endured further criticism--this time from investors--when the chain's expected earnings turned to losses.
Asked if the purchase was a mistake, Murray responded: "Don't put me on the spot like that. Let's just say that hindsight is 20-20."
Murray noted that three years ago a financial consultant hired to study Ward's prospects told Mobil officials that they could not give the company away, unless they were willing to provide financial guarantees to limit any new owner's losses.
Murray said Mobil first received "serious" offers for the 315-store chain last summer and had entered the final stage of negotiations with the buyout group three weeks ago. Other interested parties included Merrill Lynch, Shearson Lehman Hutton and Wesray Capital, analysts said.
Murray said the sale was part of the company's program to sell off assets unrelated to its core business of oil and gas. Mobil has sold off $4 billion in assets in two years, including the $1.1-billion sale of Container Corp. of America.
The price, equal to Ward's book value, was in the expected range, analysts said. "Maybe nobody will stand up and cheer, but there won't be any more losses, so nobody's going to boo either," said Michael Mayer, analyst in San Francisco with the Wertheim Schroder investment firm.
The management-led group has been rumored to be the leading bidder for the past several weeks.
Ward's restructuring began in 1981 with a 25% staff reduction, the closing of the Jefferson-Ward discount unit and the elimination of the 113-year-old catalogue sale operation.
Brennan rebuilt the chain so that merchandise in each department store was grouped into what were, in effect, speciality stores. Brennan also began opening free-standing Ward stores that sold appliances, auto parts, home furnishings and jewelry. Eighteen of the 315 Ward stores are now such free-standing specialty stores.
Ward earnings climbed to $42 million in 1985, $106 million in 1986 and last year to a record $130 million on revenue of $4.6 billion. In 1987, Ward paid Mobil a $50-million dividend.
But in an interview, Brennan acknowledged that Ward still has a way to go. With a current pretax profit margin of 5.5% on its retail operations, the company is still below average among large retailers, he said.
Variety of Competitors
"We've made substantial progress, but we know we're not all the way there," Brennan said.
Some analysts agreed. Kurt Barnard, publisher of Retail Marketing Report, said that in the past suppliers have always been willing to extend credit to Ward because they were reassured by Mobil's backing.
"Now that big daddy isn't there any more, they may not have so much confidence," Barnard said.
Barnard said that as a collection of specialty operations, Ward will face a variety of competitors who know their business well. "They're going to find that, baby, it's cold out there."
On analyst said the sale puts Mobil in a strong position relative to its competitors.
In addition to selling off unrelated assets, the company has reduced its debt as a percentage of equity to 32% from 49% three years ago, noted analyst Frank Neuttel of Prudential-Bache Securities.
Mobil has been replacing its oil reserves, and, unlike some competitors, has been making a profit on its marketing and refining operations, he said. The company also has large natural gas reserves that are expected to be highly valuable in years ahead.