DATE: Friday, July 18, 1997                 TAG: 9707180563

SECTION: BUSINESS                PAGE: 1D   EDITION: FINAL 

SOURCE: STAFF AND WIRE REPORT 

DATELINE: DETROIT                           LENGTH:   50 lines

HOME-BUILDING STORES TO MERGE

A buyout specialist will take control of Kmart Corp.'s Builders Square stores and combine them with struggling Hechinger Co. to form the nation's third-largest home-improvement chain, the companies said Thursday.

The new chain will have more than $4.5 billion in annual sales and 279 stores in 29 states and the District of Columbia, supplanting Payless Cashways Inc. in the No. 3 slot.

The chain will be owned by Leonard Green & Partners, LP. The buyout firm will pay $98 million to buy all of Hechinger's stock, but the companies did not disclose terms of the Builders Square transaction.

Kmart will have the option to purchase a minority interest in the company at an unspecified later date.

Executives with Los Angeles-based Leonard Green and Troy, Mich.-based Kmart did not immediately return telephone messages seeking comment Thursday.

The combined company will trail only Home Depot Inc., which had $19.5 billion in sales in 1996, and Lowe's Cos., which had sales of $8.6 billion.

Builders Square, which has one store in Virginia Beach, had been the fifth-largest chain and Hechinger the sixth.

But Hechinger has faltered in the shadow of giant Home Depot, which competes with 80 percent of its stores. The Largo, Md.-based retailer has posted three consecutive annual losses amid declining sales.

In the first quarter, Hechinger reported its losses more than doubled to $13.5 million, blaming falling sales on bad weather.

Kmart had hoped to sell its Builders Square chain, based in San Antonio, Texas, by the end of last year.

In April, a deal to combine the Builders Square operations with HomeBase stores owner Waban Inc. broke off after both sides agreed to pursue other interests. The merger would also have created the No. 3 home-improvement chain.

Builders Square operates 162 stores primarily in the Midwest and Southwest with 1996 sales of approximately $2.4 billion. Hechinger operates 117 Hechinger, Home Quarters Warehouse Better Spaces stores primarily in the Midwest and on the East Coast, with sales of about $2.2 billion.

HQ, which has five warehouses in Hampton Roads, has lost business to Lowes, which expanded its presence in this region two years ago. And industry observers recently sounded an ominous note at Home Depot's plans to open four to six stores in Hampton Roads.

Gerald Divaris, head of Divaris Real Estate in Virginia Beach, wasn't sure how Thursday's announcement would impact the local home improvement scene.

He speculated that Green has on his hands two chains that might not operate well together. ``It's just an incompatible group right now.'' MEMO: Staff writer Stephanie Stoughton contributed to this story.

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