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Zayre to Sell Ailing Discount Unit to Ames : 388 Stores Involved in $800-Million Deal

September 16, 1988|MARY ANN GALANTE | Times Staff Writer

Zayre Corp., the Massachusetts retailer that owns Fullerton-based HomeClub, has agreed to sell its ailing discount-store division to Ames Department Stores in a deal valued at about $800 million.

With Zayre's 388 discount department stores, Ames will roughly double the number of discount stores it operates--and more than double its revenue--making it the third-largest discount retailer in the country.

The transaction does not include the HomeClub chain of home improvement centers, and neither chain owns department stores in Southern California. Ames, headquartered in Rocky Hill, Conn., operates 348 discount stores in 18 states.

Under the agreement, Zayre will receive about $440 million in cash and a $200-million note from Ames. Zayre also will receive Ames preferred stock convertible into 8 million shares of Ames common stock at $25 per share.

Through the preferred stock ownership, Zayre will become the largest shareholder in Ames, with an equity interest of about 17.6%. Zayre also has agreed to limit its future purchases of Ames voting securities and will be entitled to nominate two Ames directors.

Zayre estimates net cash proceeds from the sale will be $620 million after expenses.

A Cash Infusion

After the sale, Zayre will own HomeClub, BJ's Wholesale Club, its minority interest in Ames and an 83% equity interest in the TJX Companies, a collection of women's apparel retailers that includes T. J. Maxx, Hit or Miss and Chadwick's of Boston.

For Zayre, the sale provides a cash infusion for its discount store chain, which has been in a financial tailspin for the past 18 months. For the first half of 1988, the division reported a $69-million operating loss on sales of $1.4 billion--contributing to Zayre's $17-million loss.

Zayre has been rumored to be a potential takeover target.

Earlier this week, rumors surfaced that the Haft family was about to launch a hostile bid for Zayre.

The sale "should provide immediate recovery for Zayre," said David Williamson, retail analyst with Advest Group in Hartford, Conn. "It will take away the operating loss from the discount division and leave all of the profits from the other divisions--we should see a big swing."

According to Williamson, Zayre reported sales of $3.2 billion during the last 12 months.

To turn around the discount department stores, Williamson said he expects Ames to analyze the stores according to profitability and immediately close or sell 60 units, "with more to follow."

"They will certainly upgrade the merchandise . . . and they'll advertise differently," he added. "It looks like a good strategic move for Ames."

With the purchase, Ames should increase its revenue from about $2.2 billion this year to roughly $5.5 billion, Williamson said.

The boards of both companies have approved the transaction, which is subject to regulatory approval and completion of financing. Ames said that it has a commitment for financing from Citibank.

THE 10 LARGEST DISCOUNT CHAINS The following is a list of the top 10 discount store chains in the United States based on 1987 full-year sales results.

1. K mart $22.1 billion

2. Wal-Mart $13.2 billion

3. Target $5.3 billion

4. Zayre $3.3 billion

5. Meijer $2.5 billion

6. Ames $2.1 billion

7. Bradlees $2.0 billion

8. Fred Meyer $1.8 billion

9. Hills $1.5 billion

10. Caldor $1.5 billion

Source: Discount Store News

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