Waban looks to bolster BJ's profitability with spin-off - BJ's Wholesale Club

Discount Store News, Nov 4, 1996

NATICK, MASS. -- In a bid to bolster the market value of its stock, Waban Inc. announced plans to spin off its BJ's Wholesale Club division as a tax-free dividend to its shareholders, with a spring closing date expected.

The move would leave Waban with its Homebase home center division.

After the spin-off, BJ's would operate as a separate, publicly held company, trading on the New York Stock Exchange.

Waban president, ceo Herbert Zarkin gave the rationale for the spin-off: Each division would perform better on its own and Wall Street would value each division higher if it stood alone.

"The board believes the proposed transaction will allow each company's management to focus exclusively on goals appropriate to the further success of its own operations," Zarkin said.

Moody's took a more skeptical view of the spin-off. It immediately placed Waban debt up for review for possible downgrade. It cited the improved performance of BJ's and the struggles that HomeBase is facing in a tough, home center competitive environment. Existing Waban debt holders could be left relying on the cash flow of Homebase for repayment, Moody's said.

The deal hinges on four conditions:

* Internal Revenue Service ruling that the dividend would indeed be tax-free;

* Shareholder approval;

* The conversion of Waban's 6.5% convertible debentures, valued at $108.6 million, into common stock at a price of $24.75 per share;

* Continued favorable stock market conditions by the time the deal concludes in the spring. Waban intends to call the convertible debentures prior to the BJ's spin-off.

As a contingency, BJ's would have to cover the $106.8 million cost of the convertible redemption, first through debt and then an expected initial public offering to raise equity, if debenture holders declined to convert them into common stock.

Waban will hold a special shareholders meeting early in 1997 to seek their approval. After the spin-off, Waban would change its corporate name to HomeBase.

Waban would benefit by being able to retire its senior notes prior to the spin-off, the company said. And both companies would benefit by improving the debt/equity ratio on their balance sheets.

The company would refinance a total of $232.6 million of debt, including $100 million in 11% senior notes, through banks, said Eileen Kirrane, head of investor relations.

Because Waban is in SEC quiet period, the company was unable to say at press time what the pro-forma debt/equity ratio of each would be, assuming a spin-off, Kirrane said. Nor is it permitted to say how much in BJ's retained earnings and equity Waban is carrying on its balance sheet.

The dollar value of the spin-off would hinge on how Wall Street evaluates the two divisions as separate companies, Kirrane said.

For each share of Waban that stockholders own, they would get a share of a new BJ's stock, she said.

The market capitalization of Waban as of Oct. 23 was $1.22 billion, based on 37.5 million shares at $27.25 per share. In light trading, Waban rose $3.25 on the news.

Since BJ's contributes 64.3% of both combined sales and operating profits, Wall Street could value BJ's at about $793 million.

BJ's accounted for $95.4 million of operating income for the 12 months ended July 1996, on sales of $2.7 billion. It now operates 79 clubs, compared to 68 clubs a year ago.

In comparison, HomeBase generated $53 million in operating profits for the 12 months on sales of $1.5 billion form 84 home centers.