MOODY’S REDUCES KMART DEBT RATING DESPITE DENIAL OF DH TAKEOVER TALKS
Byline: Catherine M. Curan and Mark Tosh Catherine M. Curan and Mark Tosh
NEW YORK — Kmart Corp. denied Friday that it was in talks to be taken over by Dayton Hudson Corp., but took a blow from Moody’s Investors Service, which downgraded the ratings on $5.9 billion of the chain’s long-term debt.
Moody’s said that despite renovating two-thirds of its stores, Kmart has not been able to boost sales growth and operating earnings in its discount stores. Moody’s also noted that Kmart is facing tough competition from Wal-Mart and Target and has problems with inventory management and merchandising. The rating agency noted some improvements at Kmart, including changes in senior management and staff cuts, but said more difficult decisions must be made to boost sales growth and lower costs. It lowered its rating on Kmart’s senior unsecured debt and medium term notes to Baa1 from A3.
According to a Wall Street Journal report Friday, Kmart executives are worried that it will become a takeover candidate and that DH would acquire Kmart as a means of expanding its own successful 611-store Target discount operation.
But at Kmart, Marvin P. Rich, executive vice president of strategic planning, finance and administration, said there was “no foundation” to the report.
“Whenever you’re going through a change like we’re going through, you have lots of different things said,” he said.
A DH spokesman said the firm does not comment on rumors.
Buoyed by the rumors Friday, shares of Kmart rose 5/8 to 14 and those of Dayton Hudson dipped 1/4 to 69 on the New York Stock Exchange. Retail analysts noted the rumors would be more credible if Kmart was a leaner and more attractive organization, but didn’t completely discount the possibility. “The rumor that Dayton Hudson wants to get rid of the department stores and concentrate on Target has kicked around for the past month or two,” said Terrence McEvoy, of Janney Montgomery Scott. There have been reports that May Department Stores could be interested in buying the department stores.
As for an acquisition of Kmart by DH, McEvoy said: “Could it happen? Sure. How much is wishful thinking? We don’t know.”
He noted that financially the deal is doable by Dayton Hudson.
“Then the question is, can they fix the rather deep-seated problems at Kmart?” he asked.
One analyst who spoke on condition of anonymity said based on conversations he had with Dayton Hudson’s management, he felt a takeover was unlikely.
Janet Mangano, Burnham Securities, questioned whether such an acquisition could be executed. She noted that Target would have to evaluate Kmart’s strength in certain markets.
Walter Loeb, Loeb Associates, said, “I don’t think Dayton Hudson is likely to purchase Kmart because quite a number of Kmart’s stores are too small and because of duplicate locations.” He said Kmart must restructure further and could close another 400 stores to become more profitable. Pamela Stubing, vice president at Moody’s, said the talk of an acquisition was premature. “Kmart is in a remerchandising mode and has new management. We have to see what they can do.”