HILLS AT THE CROSSROADS

Byline: Mark Tosh and Valerie Seckler

NEW YORK--In what could be a pivotal meeting, the new board of Hills Stores Co. convenes today to consider the future of the regional discounter. After Dickstein Partners Inc. seized control of Hills Stores Co. last week, Mark Dickstein, president of the investment firm, immediately announced, "We expect that within one month's time we will be able to disclose whether the board will endorse the sale of the company to a third party or to a management-led buyout group." He could not be reached for further comment.
Meanwhile, reports are mounting that Dickstein, who is chairman of Hills, or a separate investor group might take the company private. Dickstein owns about 14 percent of Hills and has said without a better offer, he would buy the 156-store chain for $27 a share in cash and debt.
Analysts said the value of Hills' real estate is likely to determine whether the discounter draws outside bids or Dickstein Partners does a leveraged buyout of the chain.
Rumors surfaced Tuesday that Canaan Partners, a venture capital firm in Rowayton, Conn., is a potential purchaser. In January, Canaan purchased about two dozen Jonathan Logan outlets, reportedly for $2.5 million.
Hills stock moved down 1/8 Tuesday to close at 23 1/4 on the New York Stock Exchange.
"If the real estate doesn't have great value, the LBO could be the best deal for the Hills shareholders," said Andy Jassen, founding partner of the Marketing Management Group, an apparel marketing consultant. "It seems like Dickstein's in the lead."
In the event Dickstein makes the buy, observers believe he might seek another acquisition to bolster Hills. Potential targets are Bradlees Inc., which has 136 stores and is trying to reorganize under Chapter 11 protection, and Jamesway. Responding to a WWD report, Dickstein denied any interest in combining Hills and Bradlees, but acknowledged buying some Bradlees debt. He has not commented on the prospect of consolidation with other chains.
Jamesway hired an investment adviser, Financo Inc., in June and said that there are at least two suitors for the 90-store chain.
Some retail observers believe Caldor Corp. could be snatched up. It's been one of the better-performing regional discounters until recently. Last week, its stock hit a 52-week low of $16.50 on the New York Stock Exchange.
One Wall Street analyst, who asked not to be named, said Hills, under Dickstein, has been contemplating an acquisition of another regional discounter, though the analyst added, "It's extremely doubtful that they would get financing. There is very little faith in this sector of the industry."
However, Hills' post-bankruptcy record is respectable. Last year, it reported a same-store sales increase of 5.1 percent and a net income margin of 2.2 percent (see chart). Operating earnings reached $105.8 million, an increase of 14.4 percent, and total sales rose 6 percent to $1.9 billion.
The chain filed Chapter 11 in February 1991 and emerged from bankruptcy in October 1993. Hills managed to reduce expenses in each of the past three years, from 22.4 percent of sales in 1991 to 20.9 percent last year. The goal of Michael Bozic, former Hills ceo, was to cut selling, general and administrative expenses to 20 percent of sales by 1996 and, according to a letter he sent to shareholders before last month's annual meeting, the chain was "well on [its] way" toward that goal.
"I think Dickstein and his partners believe that they have picked up a valuable piece of discount store retailing that could fill out another player's strategic map," said Arnold Aronson, principal of Levy, Kerson, Aronson & Associates retail consultants.
Peter Schaeffer, analyst at Dillon Read, said, "Venture may be interested in some sort of alliance with Hills, or with Caldor or Bradlees, for that matter.
"I don't think Target would be interested in Hills," Schaeffer added. "Hills has smaller stores in secondary and tertiary markets. I think Target probably would like to be farther down the Northeast corridor than New England."
Hills achieved its results despite Wal-Mart's expansion in the Northeast. At least 106 of Hills units compete with Wal-Mart, compared with only 20 just five years ago, according to Hills. Additionally, "almost every Hills store" competes with a Kmart and at least 12 Hills units are in competition with Target.
James L. Moody Jr., a Hills director, credited Bozic's team with "clarifying merchandise assortments and energizing employees."
"The merchandise mix is somewhat different than Wal-Mart, with more of a slant toward soft goods," Moody said. "The other thing Hills has done is upgrade the look inside the stores, the fixturing and the quality of the presentations. The stores are more appealing to consumers."Another possibility for Hills, according to observers, is that Chaim Edelstein, the former chairman of Abraham & Straus, would lead a buyout of Hills with financial backing from a separate investor group.
Edelstein, one of Hills' new directors, originally had been slated to become interim chief executive officer of Hills upon Dickstein taking control. Last week, E. Jackson "Jack" Smailes, who had resigned as executive vice president and general merchandise manager, accepted an offer from Dickstein to rejoin the firm and was named president and acting ceo of Hills. Several other top Hills executives also resigned to collect substantial severance payments. Two have rejoined the company under the new board, including Robert Stevenish, who was named senior executive vice president and chief operating officer, and William Friend, who continues as vice president, secretary and corporate counsel. Stevenish was executive vice president of stores and distribution.
John G. Reen, executive vice president and chief financial officer, will stay with Hills during a transition period.
Bozic, who was president and ceo since May 1991, resigned last week following Dickstein's proxy victory. He had strongly opposed the investor's efforts to take control of Hills, saying the choice for Hills was either "to be a real company with solid growth potential or simply a source of stock buybacks, dividends and other cash transfer activities."

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