Kmart to Sell Majority Stake in Subsidiaries : Retailing: Action on OfficeMax, Sports Authority and Borders-Waldenbooks partly meets shareholder demands.

Rebuffed by shareholders the first time around, embattled Kmart announced Tuesday that it will spin off its book, office supply and sporting goods chains to raise money for the expansion and modernization of its more than 2,000 discount stores.

Analysts said the sale of 51% of Kmart’s OfficeMax, Sports Authority and Borders-Waldenbooks subsidiaries could raise as much as $3 billion.

Kmart’s board, meeting at its Troy, Mich., headquarters, said it will sell stock to the public in each of the three chains while retaining about 49% ownership. Each new company will have independent management and separate boards.

The plan goes part of the way to meet shareholders’ demands. In June, they defeated a management proposal to sell 20% to 30% of Kmart’s equity in the three chains and Builders Square, another specialty chain owned by the discount retailer. That would have raised less than $1 billion and, critics said, prevented Kmart from focusing solely on the discount stores.

Proceeds from the sale will significantly reduce the cost of the modernization, said Mary Lorencz, a Kmart spokeswoman. “These subsidiaries were undervalued. This plan helps the specialty chains, Kmart and the shareholders.”

But Tuesday’s announcement still did not satisfy some investors, including the California Public Employees Retirement System.

“We don’t think that they should maintain any interest in the specialty outlets,” said an official at the CalPERS, which owns 0.7% of all Kmart stock. “This is more acceptable than the previous proposal, but it’s not our preference.”

Shareholders’ unexpected rebuke of management in June raised questions about the survival of Kmart Chairman Joseph Antonini. The company’s core discount stores have been losing ground to the more aggressive Wal-Mart and Target chains.

Analysts said Tuesday’s action should bolster Kmart’s ability to compete by giving it a bigger war chest but that Antonini’s future hinges on the company’s performance the rest of this year. Kmart does not need shareholder approval to proceed with this latest plan.

Kmart is trying to boost sales by remodeling and expanding its discount stores. It has already remodeled two-thirds of its 2,346 stores nationwide. About 10% of Kmart’s stores are in California.

Kmart said it will offer stock in OfficeMax “within the next few weeks.” Stock in the other two chains will be offered soon, when market conditions are favorable, the company said. Builders Square is not part of the spinoff plan.

The plan also drew mixed reaction from industry analysts.

“Kmart’s various parts are more valuable than the whole,” said Tony Howard, an analyst at Roney & Co. in Detroit. “By going this route, Kmart will realize the real value of these subsidiaries and be able to focus on its core business.”

But Linda Kristiansen, an analyst at Wertheim Schroder in New York, said she would rather see Kmart “exit these businesses completely.”

Kmart earned $377 million for the six months ended July 27, compared to income of $470 million for the same period a year ago--a decline of about 19%.