NEW YORK — Kmart Corp. is working on a new plan to divest its specialty chains, a source close to the negotiations said Thursday.
The Troy, Mich.-based retailer said in a statement, however, that it has not made a decision regarding its specialty businesses and maintained it is still studying various options.
Kmart issued the statement in response to a report carried in the New York Times Thursday that said the company would spin off the specialty chains as separate operating companies with their own boards and offer stakes to the public of up to 30 percent in the new companies.
The specialty retailers include Sports Authority, Office Max, the Borders-Waldenbooks group and Builders Square.
The new plan would require an OK by the Kmart board of directors, but would not need shareholder approval.
Reports of the new plan follow the surprise defeat of a similar management-backed plan. That plan, rejected by shareholders at the annual meeting June 3, called for offering stakes in the specialty chains through a “targeted” stock offering. Kmart would have retained control over the companies.
Susan Silverstein, an analyst with Gruntal & Co., said the new plan would give Kmart less control than the original plan, because each company would have its own board, although Kmart would still retain a large voting interest in the specialty units.
“On a positive note, this is symbolic that Kmart is willing to give up some control so it can focus on the discount stores,” she said. “Whether the new plan is different enough to shareholders who were opposed to the old plan remains to be seen.”
Under the reported new plan, Kmart would have the option of keeping some stake in the companies or selling them entirely. It would also have to pay tax gains on the new offering.
The directors will address the new plan at a board meeting this Tuesday, but a vote on it is said to be unlikely. Reportedly, the board will also look at other alternatives to raising capital at Tuesday’s meeting. The next scheduled board meeting is July 21.
Several disgruntled shareholder groups, upset with Kmart’s performance lately, want the discounter to sever ties to its specialty chains. “Getting the 30 percent offering in each of the specialty units’ names could happen very quickly and is the subject of a lot of talk here,” a source said. “The registration is done, all the financial information has already been collected and it could be announced very soon.”
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Observers speculated that the purpose of the original plan was to raise funds for a capital expenditure program aimed at modernizing many of Kmart’s core discount stores. If approved, the plan could have raised up to $900 million.
Kmart had sales of $34.1 billion last year. Joseph Antonini, chairman and chief executive officer of Kmart, said in an interview with WWD last week that the company had enough money from continuing operations to keep the pace of its $3.5 billion renewal program, which began in 1990.
He added that the purpose of the original proposal was to create a value for the specialty companies, and to provide incentive for their management teams to build them.
At least one critic of the initial plan is still skeptical of the new tack.
“We’ve been encouraging the company to make a definitive strategic decision to exit the specialty store businesses,” said Michael R. Zucker, director of corporate and financial affairs for the Amalgamated Clothing & Textile Workers Union, a large and active shareholder. “If this plan is the beginning of the process to do that, then we can support it. If, however, it is just a stopgap measure to raise cash, we don’t think it will work.”
He added that the fundamental problem with Kmart is the erosion of market share in the core discount stores, and that the company is distracted by running five businesses.
“The discount business is what drives the company,” Zucker said. “If that isn’t fixed, the company can’t be fixed. Since the annual meeting, the company has signaled that it is not moving off the idea of a partial divestiture strategy. We think it needs a different strategy.”
Zucker added that the board has again failed to discuss its plan with major “and, until now, patient” shareholders.