Home-improvement retailer Hechinger Co. on Thursday agreed to drop its sale price by 21%--to $100.2 million--after sales and earnings dropped more than expected in the second quarter.
In exchange, Los Angeles investment firm Leonard Green & Partners gave the company further assurances that the sale would go through by removing a key clause in their agreement that allowed Leonard Green room to pull out of the deal.
In July, Hechinger announced that Leonard Green would buy the company for $3 a share, or $126.6 million, and combine it with Kmart Corp. subsidiary Builders Square to form the nation's third-largest home-improvement chain after Home Depot Inc. and Lowe's Cos.
"It was the subject of very intense discussion," said John Hechinger Jr., chairman and chief executive of the Largo, Md.-based company his grandfather founded in 1911. "I am not happy that the price went down," he said, but added that he believes it is still a price that is good for all parties involved. The sale price hurts the Hechinger family as much as any shareholder, because family members retain controlling interest in the company.
But it was clear from the earnings released Thursday that Hechinger was continuing to spiral downward. The company said it lost 96 cents a share, or $40.6 million, in the second quarter ended Aug. 2, contrasted with earnings of 28 cents a share, or $12.2 million, from the same period in 1996.
Part of the loss was attributed to a charge of $31.8 million taken because the company closed seven stores in Michigan. Sales for the quarter dropped 11.2% to $591.6 million, compared with $665.9 million in the year-ago quarter. Same-store sales, considered a key indicator of a retailer's financial health, dropped 10.3%.
"It was worse than we expected, and we felt strongly, given the results, that a reduction in value was appropriate," said Jonathan Sokoloff, a partner at Leonard Green.
When asked if there was a chance that the sale of the company would not occur, Sokoloff said: "We are coming down the home stretch and a major contingency has been removed."
Sokoloff said he expects the deal to be approved at a meeting of Hechinger shareholders the last week in September, and that their purchase of both Builders Square and Hechinger would occur simultaneously.
"The earnings were disappointing, and the drop in the price is even more disappointing. It is one final humiliation for the company," said Sheldon Grodsky of Grodsky Associates Inc., a South Orange, N.J.-based securities firm and a Hechinger stockholder.
On Thursday, the Class A shares fell 50 cents to close at $2.13, and the Class B shares fell 56 cents to close at $2.25 in Nasdaq trading. The offer is for both classes of shares.