Case: Kmart & Builders Square

1. Depict and describe the various scenarios on the offer from Leonard Green.

LGP wanted to form a holding company by acquiring Builders Square and Hechinger and create the nation’s largest DIY home improvement chain with 279 stores in 29 states and over $4.5 billion in revenue.

• Kmart would receive $10 million in cash and 30% ownership interest in the new firm (if exercised). Kmart would give 162 BSQ stores and LGP would return 25 leased BSQ stores, of its choice, to Kmart, while they retained the cash from liquidating the inventory and fixtures in those stores. The new company also would assume more than $2 billion of Kmart’s long-term lease obligations, however Kmart would remain liable for 147 BSQ leases ($2,011,978 K for operating leases and $67,375 K for capital leases). LGP estimate that BSQ had approximately $700 million of net assets, and $112 million in book value.

• Hechinger would receive $128 million for its shares. As well, the new company would assume responsibility for Hechinger’s debt. Hechinger has 443 million in non-operating assets i(market value) and $102 million in book value.

• LGP wanted to increase profit margins. They also anticipated cost savings by reduction in employees. Finally, LGP would realize value by selling assets, such as inventory (in the 25 BSQ stores returned to Kmart and 9 Hechinger stores).

• LGP would sell: 9 excess Hechinger land parcels, 9 Hechinger stores, 2 BSQ stores and the BSQ headquarters. These assets sales were expected to produce $195 million on liquidity, adding BSQ’s $25 million in excess cash and Hechinger’s $55 million in excess cash.

• LGP estimates that 5 years would be necessary before BSQ and Hechinger would be healthy enough to sell for a profit (projections show total revenues of $3,819 MM for 2001)

2. From the Kmart’s point of view if Kmart’s manager moves forward with the Leonard Green offer, what would they receive as compensation? What would they give up?

If Kmart agrees to LGP’S offer, they would receive $10 million in cash and 30% ownership in the new firm. Kmart would have to give 162 BSQ stores to LGP and LGP would return 25 leased BSQ stores to Kmart, while they retained the cash from liquidating the inventory and fixtures in those stores. Kmart’s vice president of investor relations, Bob Burton, said that “getting rid f Builders Square, even for so small a cash sum, means ridding of $2.1 billion in contingency lease obligations stretched out over a 10 to 15 year period”, which I think, would be a good deal for Kmart.

3. Assuming that Kmart moves forward with the Leonard Green proposal, how do you think the newly formed Builders Square / Hechinger firm will perform? What problems will it solve (if any)? What problems remain (if any)?

The new company would have to face the big