HomeBase, Builders Square May Combine

Leonard Green & Partners, a Los Angeles-based investment firm, is in talks to combine Kmart’s troubled Builders Square home-improvement chain with Irvine-based HomeBase stores.

The new home-improvement chain would have 252 stores in 25 states and sales of about $4 billion, making it the nation’s third-largest. Both stores have been losing ground to industry leader Home Depot.

HomeBase has 84 stores in 10 Western states--about half in California. The chain, owned by Natick, Mass.-based Waban Inc., had little sales growth 1996.

Builders Square, which has been hurt by Home Depot’s expansion into its Midwestern base, has been on the sales block for more than a year. Kmart has already sold its other specialty chains--including majority stakes in bookseller Borders Group Inc. and OfficeMax Inc.--to concentrate on its flagging core retail business.

If an agreement is reached, Leonard Green & Partners would create a company that would acquire the two home-improvement chains. The Green partnership would have a majority stake in the merged company, and Kmart and Waban would have minority interests.

News of the merger talks helped boost the value of Kmart and Waban on the New York Stock Exchange. Kmart shares rose 12.5 cents to $11.25. Waban closed at $27.625, up 50 cents.

“A merged company might be able to compete more effectively,” said Asma Usmani, an industry analyst at Edward Jones in St. Louis. “Right now, Home Depot is the only true national chain. . . . Home Depot is dominant and expanding.”

With more than 500 stores nationwide, Home Depot has about twice the sales of No. 2 ranked Lowe’s, based in North Carolina. Builders Square is ranked fourth, behind PayLess Cashways, a regional chain based in Kansas City, Mo.

Other regional retail chains have been consolidated in deals engineered by Leonard Green & Partners. The company specializes in organizing, structuring and sponsoring management buyouts of established companies.

The partnership in 1994 acquired Oregon-based PayLess Drug Stores from Kmart and merged it with Thrifty Corp. to form Thrifty PayLess Inc. The partnership recently sold Thrifty PayLess to Rite Aid Corp., an East Coast drugstore giant.

Such mergers have become more common in recent years partly because larger retailers can acquire inventory from suppliers more cheaply.

The proposed home-improvement chain merger is part of Kmart’s plan to reclassify its Builders Square chain as a “discontinued operation.”