Hills in the cross hairs of takeover by Dickstein - Hills Stores, Dickstein Partners

Discount Store News, May 15, 1995 by Laura Liebeck

CANTON, MASS. -- For the second time in less than a year, Hills Stores is faced with a hostile takeover bid by Dickstein Partners, a New York-based investment firm with a 10.3% stake in the regional discounter.

Dickstein Partners, Hills' largest shareholder, seeks to acquire all outstanding shares of Hills for $25 per share. However, if Hills' board of directors rejects the unsolicited offer, Mark Dickstein, president of Dickstein Partners, promised a proxy fight to gain control of the board. He said he would work to replace the current directors and then sell Hills to the highest bidder.

Dickstein outlined his plans in a May 3 letter to Hills president and ceo Michael Bozic.

In the letter, Dickstein also requested that the Hills board of directors modify the company's shareholder rights plan to permit Dickstein Partners to discuss its takeover plans with other Hills shareholders. Hills adopted a shareholder rights plan last year after Dickstein's company initiated a proxy fight that Hills' current management successfully repelled after spending $75 million in a stock repurchase. That matter concluded in March.

Hills released a statement saying it was reviewing the takeover offer.

On May 4, Dickstein Partners filed preliminary proxy materials with the Securities and Exchange Commission that would enable it to propose an alternative slate of directors committed to the sale of Hills at the retailer's June 12 annual shareholders meeting.

The company reiterated its plans to sell Hills to the highest bidder for a price exceeding $25 per share and it requested a list of Hills' shareholders. The entire retail industry will be watching the latest battle.

"It would be a shame if a hostile takeover raid ends up saddling the company with insurmountable debt or blunting Hills' ongoing comeback," said Robert Verdisco, president of the International Mass Retail Association. "Mike Bozic and his team have done an outstanding job turning the company around and positioning it to be an integral part of the discount store industry."

Dickstein's letter to Bozic, which Hills released to the media, criticized the retailer's growth strategy. Dickstein said Hills has no business adding 20 new stores per year in the "existing retail environment." He noted that Hills is untried against Target Stores, which Hills will compete against for the first time in '95.

"We seriously question the wisdom, in the existing retail environment, of spending the capital necessary to open 20 new stores per year, particularly when weighed against the alternative of repurchasing Hills' own stock in the marketplace at approximately three times EBITDA (earnings before interest, taxes, depreciation and amortization) and when you have not yet gone up against Target Stores, who is likely to be Hills' toughest competition," Dickstein wrote in his letter to Bozic.

Hills' operating earnings rose 14.4% last year to $105.76 million, while sales climbed 6.0% to $1.87 billion.

The chain, which emerged from Chapter 11 bankruptcy in October 1993, now operates 156 stores, mostly in Midwestern states. Hills is entering new markets like Virginia and North Carolina and expanding in Western New York. A storewide renovation program is nearly complete, and the chain is in the process of rolling out a prototype with a decidedly upscale bent, which is producing marked gains over the earlier prototype.

Dickstein, chairman of the 51-unit Carson Pirie Scott department store chain in Milwaukee, noted that his group believes Hills' existing franchise is strong. He said that he is willing to increase the $25 per share offer if necessary.

Hills' stock reacted favorably to the offer, closing at 23 1/2, up 2 7/8 at the closing bell of May 3. Moody's Investor Service, however, was not impressed with the course of events and placed the retailer's senior debt rating, now at "Ba3," under review for possible downgrade

"Although Hill Stores' senior note holders are protected against a change of control, Moody's is concerned about the impact on the company's financial condition if Hills should decide to respond to the offer by taking an action that would increase its debt load, such as a new self tender--a one-time dividend to existing shareholders or an acquisition," Moody's said.

Dickstein said the group would prefer existing management to remain if he acquires Hills. However, if current management leaves, Dickstein has already chosen a replacement for Bozic: Chaim Edelstein, a former chairman of Abraham Strauss/Jordan Marsh, a division of Federated Department Stores, would become the interim ceo of Hills while a new permanent team is sought.

In case the Hills board rejects the acquisition proposal, Dickstein said he is "taking the precaution" of nominating a slate of directors at the retailer's annual meeting. These nominees include Edelstein, John Burden, former ceo of Federated Department Stores; and Dickstein Partners' Mark Brodsky, Mark Kaufman, sam Katz and David Brail. Incredibly, Dickstein added that the new nominees would, "as soon as practicable," seek to have Jack Reen [Hill's cfo] and Bozic added to the board.