Investment Group Buys 6% Kmart Stake
Shares of Kmart Corp. surged 12% on Tuesday after an investment group headed by Los Angeles supermarket magnate Ronald W. Burkle disclosed that it has purchased a 6% stake in the beleaguered discount retailer.
Burkle, a billionaire who owned the Ralphs and Food4Less supermarket chains, then engineered their sale to Kroger Co. in 1999, also indicated that, after a lengthy hiatus from the market, he is shopping for other beaten-down stocks.
Burkle revealed in a government filing that he has built a 3.5% holding in Kmart through his Yucaipa Cos. investment firm. In addition, Burkle associate Kenneth J. Abdalla controls a 2.5% stake, according to the filing.
The news sent Kmart stock up 81 cents to $7.63 on the New York Stock Exchange. The shares had plunged more than 75% in the last 2 1/2 years, bottoming at $4.75 on Dec. 28.
Kmart is in the midst of a wrenching restructuring under a new chief executive. The firm is closing stores and taking steps to overcome weak sales that have pushed it even further into the shadow of industry behemoth Wal-Mart Stores Inc.
In an interview Tuesday, Burkle, 48, said he was drawn to Kmart because of the company’s battered stock price and his knowledge of the retailing industry.
He also said he is likely to “make substantial investments” in other stocks in the wake of last year’s market decline.
“We haven’t made any investments over the last couple of years because we haven’t seen any opportunities, and I think there are a lot of opportunities in the markets now,” Burkle said. “The values have come down on a lot of companies that would be attractive to us to make investments in, and Kmart happens to be one of those.”
Burkle refused to divulge his investment intentions with Kmart, though he hinted that he supports the company’s new CEO and that he isn’t in the stock for a fast profit.
“My general investment philosophy is that I don’t want to buy anything that I’m not prepared to own forever, and that would be on a stock or on a company,” he said. “We tend to be a long-term investor. We tend to like value. We tend to like things we can understand.”
Burkle, who began buying Kmart shares in September, has paid as little as $4.97 a share for his nearly 16.7 million shares, according to the filing with the Securities and Exchange Commission. With Abdalla controlling more than 12.2 million shares, the two men have nearly 29 million shares worth more than $200 million. They have received antitrust approval to buy as much as 15% of Kmart, according to their filing.
The overhaul at Kmart dates to 1995, when a massive restructuring was launched to resuscitate a company that had fallen woefully behind Wal-Mart in the discount-retailing sector.
Kmart ousted its besieged CEO, Joseph Antonini, in favor of industry veteran Floyd Hall. In the last five years, Hall remodeled many of the chain’s 2,100 stores and upgraded Kmart’s low-brow image with branded products.
But in part because of cost-cutting, Kmart’s distribution and other internal systems badly lagged behind competitors, analysts say. That resulted in disheveled and understocked stores and poor customer service. Hall, 61, stepped down in May. “He couldn’t take it to the next level,” said Emme Kozloff, an analyst at Sanford C. Bernstein & Co. in New York.
New CEO Charles Conaway, 39, formerly a top executive at the CVS drugstore chain, unveiled a restructuring shortly after succeeding Hall. He is reshuffling management, closing 69 stores and overhauling the company’s ailing distribution system.
Kmart’s promotional strategy of trying to lure customers with sales has consistently been swamped by Wal-Mart’s “everyday low price” philosophy, Kozloff said. Almost half of the Kmart stores being closed compete with nearby Wal-Mart stores, she said.
Nevertheless, Burkle’s risk is limited because Kmart shares have been trading at “such a dirt-cheap price,” Kozloff said. Even if Kmart’s share price were to double, it would still trade at a lower valuation than its competitors, she said.
The company’s book value, or the net value of its assets, is $12.04 a share, according to Kmart.
Burkle, a friend of President Clinton’s, is known as a shrewd deal-maker and has amassed a fortune estimated at more than $1 billion. In 1999 he teamed up with onetime Hollywood super-agent Michael Ovitz in an ill-fated bid to lure a professional football team to Los Angeles.
Abdalla also runs his own investment firm. He was in the news a few years ago when he bought O.J. Simpson’s former Rockingham Avenue estate in Brentwood, later razing the home to build a new one.
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Dismal Decade for Kmart
Shares of retail giant Kmart crashed in the mid-1990s, revived after a restructuring program, then dived again amid concern over its flagging sales growth.
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Kmart shares (ticker symbol: KM), quarterly closes and latest on the New York Stock Exchange
Tuesday: $7.63, up 81 cents
Source: Bloomberg News
