Case: Kmart & Builders Square

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ownership interest of the new firm in warrants. If the new firm performs well, Kmart would clearly benefit form that as well. If it performs poorly Kmart still remains liable for 147 BSQ leases and would have to pay them off. Furthermore, If BSQ failed, Kmart would be on the hook for more that $2 billion to landlords.

5. How can Kmart’s managers evaluate whether Leonard Green’s offer is a fair one? Assuming that some portion of your response will involve valuation, try using both a multiples based and DCF based approach. What are the major uncertainties in your analysis? What are the most important assumptions that you must make?

First of all I think the uncertainty in this case is the fact of what would be the result of the deal, would two weak chains make one bigger weak chain? Or would it succeed? We can observe in the combined projections that LGP is obviously expecting the deal to work out and in 5 years being healthy enough to sell for a profit, but at the end these projection would always be uncertain. Kmart’s managers said it, BSQ chain has enough cash and working capital to continue operating for another year, but they also knew that surviving after that was highly uncertain. In my opinion, by taking the deal, Kmart had a chance, maybe a small one, but a chance of keeping BSQ alive, in the other hand, by not taking the deal, BSQ could as well been taken as lost.

6. As CEO of Kmart, would you proceed with the Leonard Green buyout? If not, what would you propose?

As Kmart’s CEO I would consider three different options. 1) Agree to the LGP terms, 2) continue to struggle to survive or 3) liquidate BSQ’s assets and take care of the leases. At this point I think that the third choice is the least risky one. This way the company won’t be taking the risk of assuming LGP will succeed, they would have the cash to pay some of their debts. Another solution I would consider is to merge with Hechinger without getting involved with LGT, this would increase the risk, obviously, but they could build a good strategy to cover more market, expand, maybe search for a different market.

7. Would your answer change if you were a partner at Leonard Green? If so, why?

Maybe, if I were a partner at Leonard Green I would have the guarantee that LGP has done this kind of projects before, they have the experience and they know the chances of the combined firm to succeed or not. I think LGP made the proposal with a reason, they see a prospering future for both companies, they think together they can move forward and be a bigger and stronger company.