ShopKo acquires Jacks, boosts Midwest presence

Discount Store News, Dec 8, 1997 by Dawn Wilensky

DAWN WILENSKY

GREEN BAY, WIS. - ShopKo came one step closer to its goal of adding 30 to 35 stores over the next three years with the acquisition of Penn-Daniels, operator of 18 Jacks discount stores.

By adding these stores to its portfolio, ShopKo will effectively improve its long-term earnings and cash flow while also achieving a modest increase in buying power.

'This deal will allow us to gain better buying opportunities and leverage operating costs,' chairman Dale Kramer told DSN. 'This, in turn, will enable us to pass the savings on to our customers in the form of lower prices and allow us to continue to offer additional opportunities for our associate and management teams.'

It is no secret that 130-unit ShopKo has been on the lookout for acquisition partners following its aborted merger with Phar-Mor last April. Kramer has been frank about his desire to grow the chain by targeting small to medium-size chains as well as his interest in cherry-picking vacated stores in contiguous markets. He said that bringing Jacks into the fold works on several levels. The chain's share similar store-level execution, consumer demographics and store size. ShopKo's typical store size is 88,000 sq. ft., while Jacks' is slightly smaller at 83,000 sq. ft.

The deal also enables ShopKo to deepen its roots in the Midwest, as Jacks has nine stores in Iowa, eight in Illinois and one in Missouri. ShopKo currently operates three stores each in Iowa and Illinois, but not in overlapping markets. Missouri will be a new state for ShopKo.

The financial community applauded the deal, particularly ShopKo's ability to find a company with stores in contiguous markets.

'The deal makes sense because the companies fit so well in terms of operations, merchandise mix and demographics,' said Richard Mercier, senior vice president, corporate finance at Moody's Investors Service. 'I have seen examples of companies acquiring companies that don't have the right fit, and the end result is usually negative.'

Under the agreement, announced two weeks ago, ShopKo will pay nearly $61 million in cash for the $200 million family-owned business. That price includes the assumption of $43 million in debt - $22 million of which will be retired when the sale closes by year-end. Penn-Daniels also operates one Lots-A-Deals closeout store in Moline, Ill., a concept that intrigues Kramer. He said that ShopKo will continue to operate it as a test.

There will be no significant change in store operations until mid-February, when ShopKo begins a store conversion process that could cost as much as $35 million, or nearly $2 million per Jacks store. Kramer was quick to point out that the dollar amount could change depending on unforeseen costs or savings. Pharmacy and optical centers will be added to each former Jacks location to reflect ShopKo's Vision 2000 format.

All stores will remain in operation during the transition, which should be completed by July 1998, 'just in time for the Back-to-School season,' Kramer said.

All administrative and buying functions will be handled at ShopKo's headquarters in Green Bay. This will result in layoffs for 130 employees at Jacks headquarters in Quincy, Ill., by February. ShopKo anticipates that more than 1,800 of Jacks' 2,100 store-level employees will be retained. Kramer indicated that ShopKo will be conducting interviews of some general office people to fill vacancies at its Green Bay headquarters. Jacks also operates a 427,000-sq.-ft. distribution center in Quincy; its fate is still uncertain.

Penn-Daniels will cease to exist when the deal closes. Its president, William Daniels, will serve as a consultant during the transition.