K mart to Buy Pay Less for About $500 Million

Continuing an acquisition binge that began a year and a half ago, K mart Corp. said Monday that it has agreed to acquire Pay Less Drug Northwest Inc., which operates 85 stores in California, for about $500 million.

Under terms of a definitive merger agreement, Troy, Mich.-based K mart will pay $27 a share in cash for all 18.5 million shares of Pay Less’ outstanding common stock. The stock purchase will be made by a K mart subsidiary through a tender offer that begins Friday.

About 5.8 million, or 32%, of Pay Less’ stock is owned by large financial institutions.

The rapidly growing Wilsonville, Ore.-based firm operates 164 drug stores in California, Oregon, Washington, Idaho and Nevada. In the first nine months of 1984, the company had sales of $651.56 million and net income of $15.27 million.

In 1980, it acquired Oakland-based Pay Less Drug Stores, which operated 61 stores under that name in California.

Pay Less shares closed Monday on the New York Stock Exchange at $27.50 a share, up 25 cents, while K mart closed at $36.125, up $1.

“(Pay Less) stock has been very strong for the last week or two,” said David Jackson, an analyst at Morgan, Olmstead, Kennedy & Gardner in Los Angeles. Pay Less’ stock price ranged from a low of $14 to a high of $27.375 during 1984, according to Jackson.

He said Pay Less has had “one of the most consistent growth records of Western-based retailers.”

He pointed to the company’s compound annual growth rate of 17% in earnings over the last five years and a 15% compound annual rate of growth in sales during the same period.

Jay Fairfield, an analyst at Piper, Jaffray & Hopwood Inc. of Minneapolis, said of the $27-a-share offer: “Based on some other acquisitions we’ve seen, it is fair value for a good company like Pay Less.”

The merger agreement is subject to approval by Pay Less shareholders and compliance with regulatory requirements.

Under the agreement, Pay Less granted K mart an option to purchase up to 1.8 million authorized, but unissued, shares of Pay Less common stock at $27 per share.

If the option were exercised, the shares would represent about 9.8% of the current outstanding stock.