Kmart to Sell Payless Chain to THC Corp. : Merger: With $1-billion deal, Thrifty’s parent firm will become the nation’s second-largest drugstore retailer.

Kmart Corp. on Thursday officially announced it will sell its Payless chain to THC Corp.--the parent company of Los Angeles-based Thrifty Drug Stores--in a deal that will dramatically expand Thrifty’s presence in the West and make it No. 2 in sales among the nation’s drugstore retailers.

That expanded sales capacity is expected to give Thrifty more negotiating strength to buy goods more cheaply and possibly pass those savings on to consumers.

Thrifty, currently ranked eighth among drugstore chains in sales, will acquire Payless when financial arrangements are completed during the first three months of 1994. THC has agreed to pay Kmart more than $1 billion in cash and securities for Payless.

The sale has been widely anticipated since The Times reported on Oct. 29 that a tentative agreement had been reached between Kmart and Leonard Green & Partners, the Los Angeles-based investment firm that controls THC. Kmart announced in August that it was placing Payless on the sales block because it wanted to concentrate on its core discount operations.

“The deal gives us an incredible competitive advantage,” Leonard Green said Thursday.

Payless, based in Wilsonville, Ore., has 572 stores in 12 Western states, including about 200 in California and about 60 in Southern California. With 497 stores in California, Thrifty is already the state’s largest drugstore retailer. Thrifty currently operates only in California, and such a merger would give it a strong presence in much of the Western half of the nation.

Green said there has been no decision whether to rename the Payless stores. He said the vast majority of the stores in the combined chain would be retained but that some stores--those in areas that have a Thrifty and Payless in close proximity--would be closed.

Green also said there have been no decisions on the makeup of the merged firm’s management team. However, Leonard Green & Partners have a history of retaining managers of firms it acquires.

Under the agreement, THC will pay Kmart $592 million in cash, $100 million in notes and will assume about $170 million of Payless’s debt. In addition, Kmart will receive about 47% of the equity in THC, a holding company that includes Thrifty and 41 drugstores operated by the Eugene, Ore.-based Bi-Mart Corp.

Thrifty had sales of $1.7 million in the year ended Sept. 30. The combined company would have annual sales of about $4.7 billion.

The nation’s No. 1 drugstore retailer--Deerfield, Ill.-based Walgreen Co.--had sales of $8.3 billion in 1993.

Kmart shares slipped 12.5 cents Thursday to close at $23 on the New York Stock Exchange.