$151 Million Bid for Discount Chain : Zayre Plans to Acquire HomeClub

Zayre Corp., a fast-growing retailer with stores mostly in the East, reached a tentative agreement Tuesday to acquire HomeClub Inc., a Fullerton-based home improvement discount chain, in a stock transaction valued at about $151 million.

In a joint statement, the firms said their directors had approved the plan, under which the Fullerton-based chain of warehouse-style home improvement centers would become a wholly owned subsidiary of Framingham, Mass.-based Zayre.

The agreement calls for Zayre to pay about $14.25 in its own stock for each of HomeClub’s 10.6 million shares outstanding. Company officials said that options granted on another 574,000 shares bring the total value of the deal to about $151 million. The plan must be submitted to HomeClub’s shareholders, who will be asked to approve the sale at a special meeting to be scheduled for early January.

The deal already has been approved by HomeClub’s directors, who collectively control 55% of that company’s stock.

To discourage competing tender offers, Zayre received an option to buy 4.3 million unissued HomeClub shares and 750,000 owned by two HomeClub officers, giving it a 34.5% stake in the company.

HomeClub, which pioneered bare-bones, high-volume, low-price retailing of home improvement goods on the West Coast, was founded 2 1/2 years ago with $4 million in venture capital. It has grown from two to 15 outlets, mostly in Southern California.

HomeClub has thrived while many other fledgling home improvement discount firms have failed in recent years, some analysts say, because of its management’s ability to make large profits on very low gross margins. As part of the proposed merger, all of HomeClub’s key management officials--including its president and three executive vice presidents--would be retained for three years, according to HomeClub President and Chairman Robert J. McNulty.

The merger gives Zayre entry into the lucrative retail markets in the West for its operations--discount apparel and department stores and wholesale discount clubs. HomeClub would receive from Zayre the financial backing that it needs--and has been unable to raise in the stock market--to continue its current rapid pace of expansion.

In a prepared statement, Maurice Segall, Zayre’s president and chief executive, said: “The acquisition of HomeClub is part of the company’s long-term strategy to become a diversified, value-based chain-store retailer.”

He called HomeClub “a very exciting, high-volume operation within a large and rapidly growing sector of retailing.”

A pending acquisition of HomeClub was widely rumored on Wall Street in recent weeks, apparently causing the value of the firm’s stock to rise from $9 to $12.75 when over-the-counter trading was halted Monday. On Tuesday, HomeClub’s stock closed at $13.50 a share.

HomeClub Chairman McNulty said Tuesday that HomeClub needs Zayre’s “deep pockets” to support its growth plans, which call for a $35 million investment over the next 12 months to add 18 stores and double the size of its chain.