Largest closeouter gets bigger

Discount Store News, Nov 17, 1997 by Laura Liebeck

COLUMBUS, OHIO -- Consolidated Stores, already the largest closeout retailer in the country, will be larger still with its acquisition of No. 2 MacFrugal's. This merger effectively consolidates the entire closeout industry into one large company plus a handful of much smaller chains.

"It's No. 1 meeting No. 2 or East meets West," said Michael Glazer, president of Consolidated Stores.

Consolidated will begin 1998 as a retailer of nearly 2,300 stores and sales of about $4.0 billion, pushing it into the top 20 on DSN's Top 200 list of discount retailers.

Consolidated, parent company to Odd Lots and Big Lots as well as Kay-Bee toy stores, next year will include Pic `N' Save and MacFrugal's in its stable of nameplates after its merger with MacFrugal's Bargains & Close-Outs is completed. The two chains announced earlier this month that they signed a definitive agreement to merge their companies in an all-stock deal worth approximately $1 billion. The merger, is expected to be completed in January.

The merger makes sense geographically, due to Consolidated's strong presence in the Southeast and Midwest and MacFrugal's' strength in the West, Glazer told DSN. The merger offers Consolidated its first crack at the West Coast through MacFrugal's well-known Pic `N' save store name.

Together, the merged chain of closeout stores will include about 1,000 outlets nationwide.

In addition to the larger, stronger size of the company and the new West Coast presence, Glazer said the other positives about the merger include the fact that the transaction is accretive to shareholders; synergies exist to further enhance the accretive nature of the merger, including Kay-Bee's assistance on toys for MacFrugal's. Currently, MacFrugal's does 8% of its sales in toys.

Since there is little geographic overlap of the two companies, few store closings are planned. In the case of store overlap in a given market -- Atlanta, for example -- Glazer said no decision has yet been made. However, he would assume that the stronger of the two names would survive in a market. In the case of Pic `N' Save, the store name will remain intact.

In-store, no dramatic merchandise changes are planned, since the two chains closely reflect one another, although MacFrugal's has a greater female orientation and Big Lots a more male focus. Glazer said Consolidated will "fine tune" the merchandise selection in the stores to reflect the best of both companies.

Consolidated chairman and ceo William Kelley said the company is "energized by what appears to be meaningful synergy opportunities between the two businesses over the coming years that will further add to the accretive nature of this transaction."

For shareholders, it's about a 10% accretion in earnings per share, Glazer said.

The acquisition of MacFrugal's is probably not the end of Consolidated's growth strategy.

"We're always looking at potential acquisitions," he said. "We look to identify businesses that would be synergistic with our own." One area of interest is furniture, he noted. No bait has yet been hooked, however, but the company's interest is keen in this area.

The stock-for-stock transaction with MacFrugal's will be accounted for as a pooling of interests and will be tax-free to both companies and their respective shareholders.

Consolidated will issue approximately 24.2 million shares of stock at an exchange ratio that will range from 0.88 to 1.0, based on the company's 20-day average closing price through Nov. 4, 1997. The retailer's stock price on that date was $41.13. (On Nov. 6, the stock was trading at $48 per share, which would reduce the amount of available stock for the transaction.) MacFrugal's shareholders are expected to receive $40.71 for each of their shares under the merger agreement.

Currently, Consolidated Stores operates 677 closeout stores plus 1,269 toy stores. Its 1996 sales were $2.65 billion with operating income of $113 million. MacFrugal's operates 325 stores in 18 states and reported 1996 sales of $773 million and net income of $43 million.