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Archive for Saturday, June 19, 1999

KMART MAY BE BUYOUT TARGET

June 19, 1999

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— Kmart Corp., the nation's No. 3 retailer, may be on the shopping list of major grocery chains, but industry analysts said Friday the discounter is more likely to find a partner than a parent.

Shares of Troy, Mich.-based Kmart rose nearly 10 percent Friday after BusinessWeek magazine quoted an unidentified New York money manager saying Kmart could fetch up to $30 a share in a buyout.

The stock rose $1.56 to $16.875 after reaching a high for the day of $17.19 on the New York Stock Exchange.

The report listed Pleasanton, Calif.-based Safeway Inc. and Cincinnati's Kroger Co. as the two most likely buyers of Kmart. Kroger is owner of Kansas-based Dillon Food Stores.

"I would put zero credibility in that," said analyst Rick Berry at J.P. Turner & Co., referring to the report.

At Safeway, senior vice president of finance Melissa Plaisance said the company does not comment on market rumors but added that the grocery chain's focus has been to acquire "high quality assets" in the grocer industry.

Kroger said it does not comment on rumors or speculation.

Robert Burton, a Kmart spokesman, said the company does not comment on rumors or speculation. He said the company still believes a strategic alliance with a grocer could be favorable for the 2,151-store discounter.

Last October, reports surfaced that Kmart was in the market for a grocery store chain and at the time, chairman and chief executive Floyd Hall told analysts he saw strategic advantages in a business combination in the supermarket industry.

"Kmart's made no secret of the fact that they're looking for a grocery partner," said Neil Stern, an analyst at retail consulting firm McMillan/Doolittle LLP. "Is there a possibility that Kmart is talking to either Safeway, Kroger or Albertson's from a supply, joint venture or partnership agreement (standpoint)? That's probably occurred."

In recent years, Kmart and Wal-Mart both have been designing stores that combine groceries and other retail goods under one roof. While Wal-Mart has been successful with its sprawling Supercenters, some Wall Street analysts have said Kmart needed another company's help to build a food distribution system.

Citing recent mergers in the grocery business, Michael Schroeder, an analyst at Wasmer, Schroeder & Co., said that while size is a key factor in that sector of retail, other issues suggest a grocery chain takeout of Kmart is remote.

Recent deals include Kroger's acquisition of Fred Meyer Inc., Albertson's Inc.'s pending merger with American Stores Co. and Safeway's purchase late last year of Midwest grocer Dominick's Supermarkets.

While Kmart has made some inroads into the supermarket business by offering groceries in its Super Kmart stores, grocery chains have made little effort in expanding out of the food retailing market, analysts said.

"The ground rules are changing but probably not that much at this point," Stern said. "There's an awful lot of what Kmart does and the types of products Kmart sells that grocery chains simply don't have any expertise in."

Schroeder also noted that if a national grocery chain were to acquire Kmart, the resulting company would have to deal with the big issue of overlapping stores creating excess capacity.

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