Discounters Mac Frugal’s, Consolidated to Merge

Consolidated Stores Corp., the nation’s largest close-out retailer, on Wednesday said it will buy Mac Frugal’s Bargains-Closeouts Inc., parent of Pic ‘N’ Save stores, in a $995-million stock deal that would create a nationwide chain of discount stores.

Dominguez-based Mac Frugal’s, the No. 2 close-out retailer, has dominated the close-out retail business on the West Coast, especially since 1995 when its stores began carrying brand-name items at about 40% to 70% less than discount giants Wal-Mart and Kmart, among others.

Philip L. Carter, president and chief executive of Mac Frugal’s, said the merger would create “a dynamic coast-to-coast presence.”

The combined company would operate more than 2,200 stores nationwide and generate an expected $4 billion-plus in revenue from its close-out stores for the fiscal year ending in January.

Mac Frugal’s 325 stores, spread throughout 18 states, employs 12,000 and specializes in brand-name goods that sell for less than wholesale prices. Besides Pic ‘N’ Save, the company owns Mac Frugal’s Bargains stores.

Consolidated Stores, based in Wilmington, Del., operates about 1,940 stores in all 50 states, primarily Kay-Bee toy stores. Consolidated also operates the Odd Lots and Big Lots close-out discount chains in the Midwest.

Carter said the merger will offer consumers more kinds of products at potentially cheaper prices.

“I would expect the consumer will get a better assortment and the prices will be as good or come down a little,” he said.

Michael Potter, Consolidated senior vice president and chief financial officer, said the merger will not have an impact on the Mac Frugal’s stores and that no store closures or layoffs are planned.

“We don’t think there will be any change [to the stores], because they have a strong foothold in California,” Potter said.

Indeed, analysts believe the merger is a natural--combining the largest East Coast and West Coast close-out retail chains.

“It’s like one store adding branches,” said analyst Laurence Leeds of Buckingham Research Group. “There’s a lot of savings.”

Wall Street had a similar reaction. In New York Stock Exchange trading, Mac Frugal’s shares soared $3.25 to close at $40.81, and Consolidated shares surged $4.31 to $45.44.

Pic ‘N’ Save, which opened in 1952, was one of the first to offer general merchandise bought through manufacturers’ close-outs sales and discontinued lines.

In 1995, the company began testing different strategies to entice more customers by offering more brand names, about 70% more, said Carter, as well as adding a larger customer service department.

The changes helped Mac Frugal’s stock price more than triple. Before 1995, shares traded at an average of $12. Since a store overhaul, the price has reached into the $35 range.

The success of the rock-bottom discount retail chain concept may be attributed in part to an increasing trend among shoppers to “treasure-hunt,” said analyst Ellen J. Ceaser of Crowell, Weedon & Co. She said that in the last few years, Mac Frugal’s stores have “focused on things that people want,” such as holiday-themed goods, school supplies for children and discounted brand-name clothing.

In Southern California, Pic ‘N’ Save faces competition not only from Wal-Mart and Kmart, which offer everyday low prices on a standard range of goods, but also from rival rock-bottom discounter 99 Cents Only Stores, based in Commerce. However, Carter said the company’s strategy won’t change.

Under terms of the transaction Consolidated said it will issue 0.88 to a full share, or a total of 24.2 million shares, for each share of Mac Frugal’s. That amounts to as much as $41.13 each--a premium over Mac Frugal’s closing stock price Wednesday.

The transaction’s exact exchange ratio would be based on the average closing price of Consolidated’s stock during a 20-day period prior to the transaction’s completion, which is expected in January, the companies said.

Mac Frugal’s had net income of $43.1 million, or $1.67 a share, on sales of $773 million in the fiscal year ended Feb. 2.

Potter said he expects the company to take a charge for the purchase at the end of its fiscal year in January of $60 million to $100 million before taxes.

The acquisition would be accounted for as a pooling of interests and would be tax-free to Mac Frugal’s shareholders. It is still subject to approval by both companies’ shareholders and regulatory agencies, the companies said.

Federal regulators may challenge the transaction because it could squelch competition, said Steve Newborn, a Washington lawyer and former Federal Trade Commission antitrust enforcer.

But Potter said he does not believe antitrust issues will derail the merger.