Hechinger merger could bring closings Builders Square in Pa., other states expected to spur consolidation; 'These guys are tough'; Names to be retained; no drastic changes coming, Green says


5/8 TC What they sell won't change that much, but the way they sell it will.

The Los Angeles investment firm that will buy Hechinger Co. and Builders Square does not intend to make a drastic change in the businesses, but will infuse significant amounts of capital and manage more aggressively.

"There will be nothing fundamentally different or drastic done to them to make them different than they are today," said Jonathan Sokoloff, a partner in Leonard Green & Partners.

Under the plan announced Thursday, Hechinger's 117 stores will be merged with Builders Square's 162 stores to create the nation's third largest home improvement chain. Leonard Green & Partners will own all of the new company.

Both chains have large "big box" stores the size of their main competitor, Home Depot, as well as smaller, usually older, stores like those surrounding Baltimore that are about 60,000 square feet.

Green & Partners intends to keep the Hechinger and Builders Square names and likely will keep both types of stores, although some closings are likely in states where Hechinger and Builders Square compete. The two companies have overlap in Kansas, Illinois, Michigan, Alabama, Tennessee, Virginia and Pennsylvania.

The greatest overlap appears to be in Pennsylvania, where Hechinger has 20 stores and Builders Square has 11.

Sources close to the deal said the new chain may well begin appealing to women and have a "softer feel." Hechinger's began trying out a new model store, opened in Albany, N.Y., which has greater emphasis on home decor.

Green has a decade-long track record of mostly successful turnarounds and is known for its shrewd, tough business decisions. The firm merged two failing drugstore chains, Thrifty Drug and Kmart's Payless Drugstore chain, and made them profitable. Green then sold the company for $2.5 billion to Rite Aid Corp last year.

The Thrifty Payless merger might well serve as a model for the Hechinger and Builders Square combination, analysts suggested yesterday.

Both Largo-based Hechinger's and Builders Square have experienced declining sales and earnings, battered by competition from Home Depot and Lowe's.

Kmart has been trying to sell Builders Square for several years. The subsidiary is listed as a discontinued operation on Kmart's financial statements.

"Above all, [Leonard Green] brought a very severe sense of discipline to Thrifty and Payless. These guys are tough," said Joe Coulombe, a semiretired executive who was co-chairman of the board of Thrifty when Green bought it.

When Pacific Enterprises & Co. purchased Thrifty Drug, it brought in Coulombe in 1992 to figure out what to do with it. He advised them to sell it.

"Thrifty was not a very well-run company. It was a lousy company. Walgreen was completely beating them," Coulombe said.

Green bought the companies very cheap, he said.

Green intends to buy Hechinger's for $3 a share of stock or $126 million, plus $381 million in assumed debt within the next three months. Kmart will sell Green its Builders Square subsidiary for $10 million plus a warrant to purchase a minority interest at a later date.

Coulombe said that once Green purchased Thrifty, he immediately sold a small group of its drugstores in Hawaii and spun off a sporting goods subsidiary. That generated capital that could cover the operating losses. "He built up a war chest of cash and knew how long it would last him," Coulombe said.

In addition, the firm closed warehouses, consolidated headquarters and wasn't afraid of sacred cows, such as the killing advertising that the company had always placed in the Los Angeles Times.

Some analysts said the combined company might be able to purchase products more cheaply and be able to lower prices somewhat and spur sales. But others discounted that advantage.

"Once you hit a certain size, you're probably buying pretty good and you can't get a whole lot more discounts," said Don Longo, editor of the National Home Center News. " The major opportunity lies in expense savings -- advertising and marketing dollars."

Pub Date: 7/19/97

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