Kmart spin-offs wow Wall Street and refuel parent chain; OfficeMax goes public, earning $642 million at $19 per share

Discount Store News, Nov 21, 1994 by Laura Liebeck

Office Max goes public, earning $642 million at $19 per share

SHAKER HEIGHTS, OHIO -- In a little over two months, OfficeMax went from being a wholly owned subsidiary of Kmart to a comer of a public company in its own right.

The chain's coming-out party raised approximately $642 million, including the exercised over-allotment option. At $19 per share, the stock price came in at the high end of Wall Street's estimates.

Wall Street was waiting for OfficeMax to enter the public domain, bidding up the stock by $5.50 per share during its opening day of trading to close at $24.50. Since then, OfficeMax stock has maintained its energy, closing at $25 1/4 on Election Day.

"We've been a well-kept secret," company president Michael Feuer said after OfficeMax's name was added to the list of companies on the New York Stock Exchange on Nov. 2.

While Feuer's drive to get the company in the public domain was paved with a 10-country tour that included 40 cities and more than 1,000 institutions around the world, he was still somewhat surprised about the final price of the stock.

"Ninteen dollars is astounding. It was at the highest end of the range," Feuer said. "It was a great deal for Kmart."

Because of high demand for the stock, Kmart's equity position in OfficeMax is being reduced from 30% to 25%. Last summer, when Kmart first said it would spin off OfficeMax and its other subsidiaries, the giant discounter also said it would maintain a majority position in the companies, turning over up to 30% to the public. Since then, the picture has changed dramatically.

As the IPO process moved forward, Kmart kept increasing the size of its stock sale to take advantage of the market's reception to the spin-off. The discount store giant settled on reducing its stake in OfficeMax to 30.4%, but with the underwriters' over-allotment option on shares, Kmart's position in the office supplies chain will be reduced to 25%.

"Kmart has decided to take advatage of this market opportunity to accelerate the sale of our ownership interest in OfficeMax," said Joseph Antonini, Kmart's chairman, president and ceo. "This action is in line with the expectations of our shareholders and is consistent with our specialty retailing strategy."

The net proceeds of the OfficeMax sale go directly to Kmart, which will use the funds to pay down debt and to help finance the renewal and expansion of its discount store division.

OfficeMax filed its Form S-1 with the Securities and Exchange Commission on Aug. 31.

The spin-off of the office supplies chain included 33 million common shares of stock, about 23.4 million shares by OfficeMax and 9.6 million shares by Kmart. The over-allotment adds another 2.7 million shares to Kmart's total.

Donaldson, Lufkin & Jenrette Securities, Morgan Stanley & Co., William Blair & Co., Dean Witter Reynolds, and McDonald & Co. Securities, handled the public offering.

Now that the sale is complete, shareholders will evaluate the performance of OfficeMax directly, something Feuer has long said he wanted.

Feuer and a partner started OfficeMax in 1988 with a single store in suburban Cleveland. In 1990, OfficeMax sold a 21.6% interest in the company to Kmart, then in the throes of expanding its specialty store division.

The marriage worked so well for both companies that Kmart upped its investment in OfficeMax to 93% in 1991--Feuer and other members of the management team maintained a 7% ownership position--providing the office supplies chain with huge corporate support to greatly expand the chain, and it certainly did. OfficeMax grew through a combination of new store openings and acquisitions, the biggest of which was buying BizMart last year.

Although a Kmart company, OfficeMax operated independently of Kmart. Feuer was charged by Antonini to run the business and to consult with Kmart headquarters when needed. Feuer has always maintained that Antonini was a champion of OfficeMax's leadership and its strategies.

As a result, OfficeMax grew to 352 stores in 39 states and plans to maintain a strong expansion program, adding about 70 stores per year to its base.

By entering the public domain, OfficeMax can trade on its accomplishments independent of Kmart's troubles. Kmart, for its part, will get a much-needed cash for its own programs.

"The beauty of the deal is that we're debt-free," said Feuer. He said that the company has $664 million in equity, no debt and a $100 million line of credit from Key Corp., which operates Society National Bank.

"We're cash-positive next year," he said, noting that the chain is well-positioned to take advantage of opportunities that arise, although he declined to elaborate.

Last year, OfficeMax produced sales of $1.4 billion, and this year the chain is expected to top the $2 billion sales mark.

The Sports Authority spin-off expected to raise more than $167 million

TROY, MICH. -- Kmart increased the size of its proposed spin-off of The Sports Authority, reducing its stake to as little as 30% from 49%.

Kmart now intends to sell 12.3 million shares of its sporting goods specialty chain, an increase from 10.2 million.