Zayre Agrees to Acquire HomeClub : Move Would Give East Coast Firm Presence in West
Zayre Corp., one of the nation’s fast-growing retail firms with stores mostly in the East, reached a tentative agreement Tuesday to acquire HomeClub Inc., a fast-expanding West Coast home improvement discount chain, for stock valued at approximately $151 million.
In a joint statement, the firms said their boards of directors had approved the plan in which the Fullerton-based chain of warehouse-style home improvement centers would become a wholly owned subsidiary of Framingham, Mass.,-based Zayre Corp., with annual revenues of $3 billion.
Under the agreement, Zayre would swap its stock at a rate of $14.25 for each of HomeClub’s 10.3 million outstanding shares. Company officials said that options granted on another 574,000 shares bring the total value of the deal to about $151 million. The plan must still be approved by HomeClub’s shareholders, who will vote on the matter at a special meeting to be scheduled for early January. They will be advised to accept the merger by HomeClub’s directors, who collectively control 55% of that company’s stock.
To discourage competing tender offers, Zayre received an option to buy 4.3 million unissued HomeClub shares and 750,000 owned by two HomeClub officers, giving it a 34.5% stake in the company. Directors controlling the 55% block of stock also granted Zayer an irrevocable proxy to vote their shares in favor of the merger.
Highlights Success
Zayre’s offer highlights the tremendous success of the bare-bones, high volume-low price retailing of home improvement goods pioneered on the West Coast by HomeClub. The company was founded 2 1/2 years ago with $4 million in venture capital. It has grown from two to 15 outlets, mostly in Southern California. Another three stores are scheduled to open within a month.
HomeClub has thrived while many other fledgling home improvement discount firms have failed in recent years, some analysts say, because of the ability of the company’s management to make large profits on very low gross margins. As part of the proposed merger, all of HomeClub’s key management officials--including its president and three executive vice presidents--would be retained for three years, according to HomeClub President and Chairman Robert J. McNulty.
Through the proposed merger, Zayre, which operates discount apparel and department stores and wholesale discount clubs mostly on the East Coast, would gain entry into the do-it-yourself market and its first retail presence west of the Rockies. HomeClub would receive from Zayre the financial backing it needs--and has been unable to raise in the stock market--to continue its current rapid pace of expansion.
In a prepared statement, Zayre president and chief executive officer Maurice Segall said: “The acquisition of HomeClub is part of the company’s long-term strategy to become a diversified, value-based, chain store retailer.”
He called HomeClub “a very exciting, high-volume operation within a large and rapidly growing sector of retailing.”
A pending acquisition of HomeClub was widely rumored on Wall Street in recent weeks, apparently causing the value of the firm’s stock to rise from $9 to $12.75 when trading was halted on Monday by the National Assn. of Securities Dealers. When trading resumed Tuesday, HomeClub’s stock jumped again to close at $13.50 per share.
HomeClub went public Oct. 29 to raise expansion capital but was disappointed by the outcome. Unable to sell its stock for an initial offering price of $14 to $16 a share, the company reduced its per share price to $9 and sold 2.3 million shares, raising a total of $20.7 million.
Needs ‘Deep Pockets’
HomeClub Chairman McNulty said Tuesday that HomeClub needs Zayre’s “deep pockets” to support its growth plans, which call for a $35-million investment over the next 12 months to open an additional 18 stores--doubling the size of its chain. Without Zayre’s offer--which McNulty said came unsolicited only two weeks ago--HomeClub would have been forced to sell more stock, borrow or slow its growth.
“We could have gone back to the capital markets, but that costs a lot of money,” McNulty said. He added that fund raising is distracting to the company’s management. “We don’t want to lose concentration,” he said.
While the sale of HomeClub was not unexpected, identification of Zayre as the suitor came as a surprise to several analysts. Although they realized that Zayre was in an expansion mode, they do not consider discount do-it-yourself home centers to be a wise purchase for the corporation.
“Frankly I was surprised by it (the merger proposal),” said Terry McEvoy, vice president of research for the Smith Barney investment brokerage firm in New York. McEvoy said that to date HomeClub has proven itself “only marginally profitable” and faces increasingly stiff competition. He observed that within recent months discount competitors, including Atlanta-based Home Depot, Mr. Howe and Builder’s Square, a division of K mart, have begun to aggressively enter the Southern California market.
Analyst’s Comment
Similarly, Harry E. Wells, an analyst with Boston-based Adams Harkness & Hill Inc., said that of all potential acquisitions by Zayre, he would have put HomeClub “on the bottom of the list.”
