11/10/97 THE BOTTOM-FISHER KING OF RETAIL

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THE BOTTOM-FISHER KING OF RETAIL
LBO specialist Leonard Green is raising a billion for more deals
Leonard Green has come a long way from his youth, when he spent his days at Culver Military Academy in Indiana as his widowed father traveled the road selling dresses. Today, paintings by such American Impressionist masters as Childe Hassam line the walls of his lavish Los Angeles office and new $6 million Bel Air home. But while his lifestyle has changed, Green hasn't strayed that far from the unglamorous trade his family plied. On the heels of a pair of shrewdly crafted leveraged buyouts of chains for home improvement and sporting goods, the courtly, 64-year-old Green has emerged as the nation's leading retail buyout specialist.
Since September, Leonard Green & Partners, his 13-person LBO firm, has raised $600 million to buy troubled home improvement retailer Hechinger Co. and Kmart Corp.'s Builders Square. It also has merged its Denver-based Gart Sport chain with Sportmart, creating the nation's second-largest sporting goods retailer. Now Green has an appetite for more. He is raising a new fund that industry sources say could hit $1 billion and intends to be well positioned to buy into a weakening stock market. ''In the early 1990s we missed out on some deals. We don't want that to happen again,'' says Green.
TRAVELING PARTNERS. In the past, the complexities and paper-thin margins of retailing have tripped up scores of leveraged buyout firms. But they have been very good to Leonard Green, who thrives on just those factors. Even with a total wipeout on a Rhode Island supermarket chain that went bust in 1991, Green's firm has chalked up annual compound returns of 81% since 1990 with a portfolio that has included such disparate holdings as an Alaskan supermarket chain and a Los Angeles-based sneaker chain.
Much of Green's success, though, stems from his knack for rooting out bargains, typically companies that are underachievers, in financial trouble, or family-owned. He has five partners, all a generation younger than he is, and they are constantly flying around the country in search of opportunities. Because Green usually finds his own deals, rather than buying companies at auctions led by investment banks, he tends to get a good price.
Green's most ingenious and lucrative deal was his 1992 acquisition of Thrifty, an ailing drugstore chain. Thrifty was losing $2 million a week with its parent drawing close to bankruptcy. And because of a complicated tax situation, Green had to assume unfunded pension liabilities. But as a result, he took Thrifty for just $37.5 million in cash. Two years after buying Thrifty, he used its balance sheet to buy out Kmart's Payless for $1.2 billion. Then he paid down much of that debt by bringing the combined company public. In 1996, within months of the offering, Rite Aid Corp. bought out the company for $2.5 billion. The result was a $459 million net gain on Green's original investment. As part of the deal, Green also acquired Gart Sports, which he merged into Sportmart, taking control of a company worth an estimated $225 million.
VITAMIN BOOST. Green's skills in handling distress merchandise are now so well-known that people bring him deals. Pleased with Green's success with Payless, Kmart agreed to practically give him Builders Square, a dilapidated home improvement operation that had $2 billion in outstanding lease liabilities, if Green found a third party with which to merge it. Then, Green got a call from John Hechinger offering up his family's troubled Maryland chain. He accepted, and as he did with Thrifty, intends to slash overhead, improve store merchandising, and then either bring it public or sell it off. Hechinger's is unlikely to become a formidable housewares giant. But Green's investors face little risk. The company paid $35 million in equity for two companies with an estimated book value exceeding $600 million.
Green's latest additions fit well with the eclectic collection of wounded properties he has turned around such as an undervalued Australian gold mine. A stake in a Long Island vitamin maker called Twinlab Corp. earned Green a 3,216% return in the one year he held it.
With $1 billion in fresh cash on the way and a few new partners the firm has poached from Donaldson, Lufkin & Jenrette Inc., the biggest risk is that Green's selectivity could diminish. What is on his plate? ''I don't like retail,'' he insists, ''but with the consolidation and underperformance, it is so fertile.'' If the stock market remains dicey, for Green that could be so much the better.
By Kathleen Morris and Eric Schine in Los Angeles

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