May deal makes sense for two major chains; Bradlees-Caldor, Target-Venture possible - May Department Stores Co. selling Caldor Inc. and Venture Stores Inc. discount store chains; Bradlees and Target Stores are interested

May Deal Makes Sense For Two Major Chains

Bradless-Caldor, Target-Venture Possible

About all anyone can say for certain about the proposed sale of Caldor and Venture is that a lot of retailers and investor groups would love to own the chains--if the price is right.

But it apparently wasn't right for the first go-round, one analyst of retail stocks speculated, when May Department Stores privately solicited bids for its discount chains. Consequently, May had to call on the services of Morgan Stanley to put the chains on the public auction block in June and find a buyer willing to pay the price, said the analyst for a major New York brokerage house. (The analyst requested to remain nameless because clients of his firm may well be in the running for either or both chains.)

All May will say about the proposed sale is to reiterate that it's in no hurry. It plans to sell the chains and invest the proceeds in its primary business, department stores, for a greater return on assets. May will want a hefty $1.5 billion for the chains because they are ongoing, profitable businesses, rather than distressed chains, valuable only for their real estate, analysts estimate.

Anyone who expects to get a bargain, such as the 76 Gold Circle units that were sold for $325 million, or the 388 money-losing Zayre stores which fetched less than $800 million, will have to keep looking.

May chairman and chief executive officer David Farrell was in New York late last month opening a preliminary round of bids, a Caldor source said at last month's Hardware Show in Chicago. "We were told that there are six to eight bidders," the source said.

It probably will take at least a couple of months for May to separate the serious contenders from the rest and give them a chance to meet with chain management, view the books and make a final offer, speculated David Poneman, retail analyst for Sanford C. Bernstein & Co.

As the less profitable of the two, Caldor stands at greater risk than Venture of being sold as real estate, rather than as an ongoing business.

In 1988, Caldor's operating profits fell for the third year in a row to $50 million on sales of $1.57 billion from 119 stores (now 120), while Venture earned $81 million on sales of $1.28 billion from 73 stores.

For July, same store sales for Caldor dipped 0.6 percent, while overall sales rose just 0.2 percent to $98.1 million. For the year to date, however, sales went up 5.7 percent to $713.4 million, with same store sales rising 4.2 percent.

At Venture, July sales rose 6.1 percent to $83.8 million. Same store sales gained 4.9 percent. For the first six months of the year, Venture's sales increased 4.9 percent to $565.3 million. Same store sales rose 3 percent.

In its financial reporting, May is treating both chains as discontinued operations.

As a Caldor bidder, "I wouldn't rule out Bradless," Poneman said, even though some overlap exists between its stores and Caldor units.

Kohlberg Kravis Roberts & Co. took Bradlees' supermarket parent, Stop & Shop Cos., private last year in a $1.3 billion leveraged buyout. It owns 85 percent of Stop & Shop, with management owning the balance. High prices and financing never has been much of a hindrance to KKR, as evidenced by its $25 billion leveraged buyout of RJR this year.

A Bradless spokeswoman wouldn't discuss the company's possible interest in buying Caldor.

A DSN analysis of operating markets shows that 87 Caldor stores out of 120 operate in the same metropolitan statistical areas as 89 of 131 Bradless stores. However, in terms of operating in the same towns within those metro markets, only 23 Caldor units, or 19 percent, operate in the same town as a Bradless unit.

And apparent overlap actually may be complementary, Poneman said, unless the stores operate across the street from each other.

Another factor in Bradless' favor is that its supermarket parent possibly could convert any excess or overlapping Caldor units into supermarkets. Stop & Shop could convert Caldor units into its Heartland supermarket format.

A consolidation of Bradless and Caldor would produce a $3.5 billion regional chain with a stronger lock on the Northeast to head off an expected expansion of Wal-Mart, spearheaded by its plans to invade New Jersey, New York and Pennsylvania with a batch of Sam's Wholesale Clubs.

Such a move also would amount to a pre-emptive strike to keep Target--another likely bidder for Caldor--out of the Northeast.

On the surface, Bradless would be an unlikely candidate, having closed 37 stores in its Southern division after KKR took it private and sold 35. But that proved to be a salutary move, with operating profits soaring by 49 percent to $84.9 million last year.

As for a Venture deal, Pone-man said, "I wouldn't rule out Target."

Target has asked May for a prospectus regarding Caldor and Venture, said a Target executive.

The conventional wisdom, however, is that May would demand too high a price for Caldor and present too much store overlap with Venture.

Indeed, talk within the industry has Target's parent, Dayton Hudson, sitting on a lowball offer, at least for Caldor, waiting for May to come down to its price. Target would be willing to pay $600 million for Caldor's real estate, one analyst estimated, against May's expected price of $750 million to $850 million for the chain.

Target was only too willing to buy 30 Gold Circle stores last year for a swift entry into the Southeast and more than 50 Gemco stores the previous year to enter Southern California. But it didn't buy the chains as ongoing businesses.

As in the case of Bradlees and Caldor, the supposed overlap between Target and Venture stores may be less than meets the eye.

Out of 73 stores, 21 Ventures operate in the same markets as 20 Targets. But in the case of individual towns, only 14 Ventures, or also 19 percent, compete in the same community with Target units.

And they are concentrated in Oklahoma City, with four Venture units and four Target stores, and the communities that comprise the St. Louis metro market, 10 Ventures against eight Targets.

Moreover, a Venture acquisition would give Target a quick entry into the Chicago market, with 15 units.

And, acquiring Caldor would give Target a foothold in the Northeast and move it a step closer to becoming a national chain.

Most analysts agree that Hills Department Stores, which picked up 35 former Gold Circle stores when that chain was sold off last year, probably is carrying too much debt right now to be a serious contender.

In the face of rumors that wafted about the Hardware Show regarding supposed bidders, Venture merchandisers remained unaffected by the proposed sale. "We're going forward with 1990 programs as if the sale weren't under way," said John Haunschild, vp and dmm, toys, hardware and automotives.

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