Discounter issues ride crest of biggest merger wave yet

Discount Store News, July 17, 1989 by Neil Nordby

Discounter Issues Ride Crest Of Biggest Merger Wave Yet

In the mergers and acquisitions game, 1989 is definitely becoming a big deal.

In fact, it has become the year of the Big Deal. And nowhere is this merger and acquisition fever running at a higher temperature than in the discount store industry, as yet another bout of takeover fever roiled this sector during the second quarter.

Discount store stocks are on a tear, and so is the Discount Store News Stock Index.

That's not anything new, however, as buyouts among these concerns have been going on for quite some time now, as this quarterly feature has illuminated in past reports.

Thanks to: the maturity of the retailing industry, the popularity of junk bond financing, undervalued real estate holdings, and relatively steady and stable cash flows, discounters continued to be one of Wall Street's favorite takeover targets.

The DSN Stock Index reflects this merger mania that continues to shake up and shake out the industry. For the quarterly trading period ended June 30, our index of 58 retailers continued its bull run, gaining another 72.77 points, or 4.91 percent.

In fact, the DSN Stock Index hit a post-crash high of 1604.20 in early June. Of the 58 companies in our financial barometer, gainers outpaced losers by better than a 2-to-1 ratio (38 retailers advanced while 16 declined in stock price), further emphasizing the strong performance of retailers last quarter.

So, once again, investors were off to the races last quarter, trying to ride the coattails of the next takeover deal. And, there were plenty of opportunities to do so as our accompanying stock table reveals.

Among those retailers making headlines on Wall Street over the last three months were: * QVC (up $7.63 a share to $16.75) was actively traded on the takeover front in late June, as QVC offered to buy all of CVN's common stock in a deal valued at more than $400 million. QVC and CVN both sell retail products through cable television home shopping networks. For the quarter, QVC took largest dollar-gained honors of all the stocks in our portfolio. CVN also soared, tacking on $3.50 a share, or 23.53 percent, to finish at $18.38. * Newmark & Lewis surged 38.89 percent higher to $6.25 a share after hiring Wertheim Schroder & Co. to explore ways of enhancing shareholder value, which has languished of late. The company said it hasn't received any take-over offers to date. * Zayre acquired the minority shares in its 83 percent-owned TJX retail chain in an exchange of 1.45 shares of Zayre for each share of TJX. As part of the restructuring, Zayre changed its name to TJX Cos., which closed the quarter at $18.13, up 12.4 percent. * Penn Traffic Co. completed its acquisition of Big Bear for $38.60 a share, or $352 million. The agreement culminated an auction process begun by Big Bear for $35 a share. Big Bear has been eliminated from our financial barometer as a result.

Restructurings were equally popular with discounters last quarter. Leading the list of restructurings was May Department Stores, which gained $3.50 amid reports it is looking to sell its Caldor and Venture discount store division. The two units, which together accounted for nearly 25 percent of May's $11.5 billion in sales last year, could fetch around $1.5 billion.

Other discounters restructuring last quarter include: * Service Merchandise (up 28.21 percent to $18.75), which paid a special $10 cash dividend to shareholders and will omit its quarterly dividend payouts as a result. * CVN also said it will pay a special $10-a-share dividend to shareholders after reporting third quarter operating earnings more than tripled. * Likewise, The Price Co. paid a special $1.50-a-share cahs dividend to its shareholders.

Crazy Eddie was alo in the news last quarter, as it plunged 52.38 percent to 31 cents a share after a group of creditors filed a petition to force the retailer into involuntary liquidation. Separately, Crazy Eddie reported a $27.6 million fiscal fourth quarter loss and said it might file for bankruptcy court protection unless its cash flow problems are resolved. As a result, Crazy Eddie was the largest percentage loser last quarter.

Neil Nordby is president of Nordby International, Boulder, Colo.-based stock market analysts and a Wall Street columnist.