Kmart Trying to Sell Pay Less Drugstore Unit : Retail: Sale to a rival firm could reshape the competition among retail pharmacy chains in California.

Kmart Corp. on Wednesday said it is soliciting offers for its Pay Less drugstore unit, a move that could dramatically alter the competitive landscape among pharmacy retailers in California.

With Pay Less’ ranking as the state’s fourth-largest drugstore chain, major western competitors may be among those considering bidding for the company, some industry analysts suggested. Of the chain’s 552 stores in 12 western states, 216 are in California--including 60 in Southern California.

Possible bidders mentioned by analysts included Leonard Green & Partners, a Los Angeles-based investment firm that acquired the Thrifty Drug Stores chain from Pacific Enterprises in May, 1992. Lead partner Leonard Green is expert at acquiring companies through leveraged buyouts that give the target firm’s management an equity stake in the company.

Some analysts suggested that Green might want to merge Pay Less with Thrifty, thus creating a dominant California drug store chain. With 497 stores in California, Thrifty is already the state’s largest drugstore retailer, followed by Sav-On Drugs and Longs Drug Stores.

Green on Wednesday said he is aware of the Pay Less offering but would not comment further.

“Green is definitely a possibility,” said Kurt Barnard, a New York-based retail economist. “Pay Less has a good financial record, and it’s easier to retain a company’s management by arranging a leveraged buyout.”

Industry analysts said bids for Pay Less could range between $500 million and $1 billion. The Wilsonville, Ore.--based Pay Less had earnings of $113 million on revenue of $2 billion in the fiscal year ended Jan. 31.

New York-based investment house Merrill Lynch & Co. is advising Kmart on possible sales options, Kmart said. However, Kmart spokeswoman Mary Lorencz declined to say how much the Troy, Mich.-based retailer expected to get from such a sale or whether an auction was planned.

Citing unidentified sources, the Wall Street Journal on Wednesday reported that Merrill Lynch is conducting an auction for Pay Less and that Kmart is seeking bids from other retailers and from the investment community, including leveraged buyout specialists.

Kmart has contended that its specialty retailing units--including Waldenbooks, Builders Square home improvement stores, the Pace warehouse club chain, Sports Authority sporting goods shops, Officemax office supply stores and Pay Less--are undervalued by Wall Street.

“Selling Pay Less would certainly be one way to enhance (Kmart) shareholder value,” spokeswoman Lorencz said.

Kmart stock climbed $1.125 per share to close at $21.75 on Wednesday and was the New York Stock Exchange’s highest volume issue.

Speculation about Pay Less was sparked in May when Kmart Chairman Joseph Antonini, speaking to reporters at the company’s annual meeting, indicated that minority interests in some of those specialty units might be sold.

“Over the last year or so, we have analyzed each of our businesses with respect to their strategic fit at Kmart,” Antonini said in a statement Wednesday. “The process includes the consideration of the outright sale of the Pay Less business. We can’t at this time predict the outcome of this process.”