Warehouse retailer Waban Inc. said Wednesday it has ended discussions to merge its HomeBase home-improvement division with the Builders Square division of Kmart Corp. and a Los Angeles buyout firm.
The merger would have produced the third-largest home improvement retailer in the U.S., with about 250 stores in 25 states and annual revenues of nearly $4 billion.
Waban said discussions with Kmart and Leonard Green & Partners LP of Los Angeles had not produced an agreement acceptable to all parties. In February, the retailers said they planned to sell Waban's Irvine-based HomeBase and Kmart's Builders Square chains to Green for cash and stakes in the new company, which was expected to have the size and expertise to better stand up to industry leader Home Depot Inc.
Natick, Mass.-based Waban said it was unable to reach an acceptable agreement for the combination.
The move, though, leaves Kmart with a money-losing chain it has been trying to shed for years.
"This puts Kmart in more of a hole than Waban," said UBS analyst Annie Erner.
Troy, Mich.-based Kmart's shares fell 12.5 cents to close at $11.875. Waban's shares fell 62.5 cents to $27.25 before trading was halted before the announcement. Both trade on the New York Stock Exchange.
Kmart said it was disappointed by Waban's sudden withdrawal and said it will pursue other options on Builders Square with Green, said Marvin Rich, an executive vice president for Kmart.
Green, which would have become a majority owner of the new company, declined to comment, referring all calls to Kmart.
Waban, for its part, said it will proceed with its previously announced plan to spin off its BJ's Wholesale Club division in a special dividend to Waban shareholders. BJ's Wholesale Club is one of the largest membership warehouse club chains in the Northeast, with 81 outlets.
Kmart took a $385-million fourth-quarter charge to discontinue Builders Squares' options. Kmart and Green should be able to structure another transaction, analysts said.
"The last thing Kmart needs now is to continue to be encumbered by a burden that is a drain on finances and energy," said Kurt Barnard, president of Barnard's Retail Marketing Report.
HomeBase, which operates 84 home-improvement stores, has seen slow sales growth in the last year, mostly because of tough competition in Southern California, where the bulk of its stores are located.
Builders Square has been hurt by Home Depot's expansion in its main Midwest market.