Leonard Green & Partners, a prominent Los Angeles buyout firm, has reportedly signed a letter of intent to buy K mart Corp.'s Pay Less drugstore chain for about $1 billion.

While it's unclear at this point how the deal will be financed, it's expected that bank loans would account for a substantial portion of the funding.

Among the banks that appear well positioned to play a leading role in the buyout are Bankers Trust and Citibank.

Both banks have led past deals for Leonard Green. They are also investors in the firm's equity fund.

Bank Financing Estimate

"At this point, I don't know how the deal will be structured and financed," said an official in Bankers Trust's West Coast office.

He added, though, that it was "more than likely that we will somehow be involved."

Based on the size of the buyout, it's possible that bank financing could amount to as much as $500 million or more.

K mart put the Pay Less chain on the auction block in August. As the auction dragged on, and some of the potential bidders dropped out, speculation began to grow that K mart would pull out of the deal.

Comments Not Forthcoming.

A spokesman for K mart - the nation's second-largest retailer - declined to comment Friday on a report in the Los Angeles Times that the company had signed a letter of intent with Leonard Green.

"When there is an agreement, we'll announce one," the K mart spokesman said.

A spokeswoman for Leonard Green also declined to comment.

In terms of size, the Pay Less deal would be comparable to the recent buyout of a group of specialty food brands by an investor group led by Texas billionaire Robert Bass.

The specialty foods deal was financed with more than $500 million of bank loans, led by Chemical Bank.

Chemical is not expected to play a role in the Pay Less buyout, because the bank is not a participant in Leonard Green's buyout fund.

In addition to Bankers Trust and Citibank, other banks that have invested in the fund are Wells Fargo and Union Bank of Switzerland.

Pay Less operates more than 550 stores throughout the West, including some 200 in California.

Last year, the chain had revenues of more than $2 billion.

Leonard Green controls Thrifty Drug stores, which is based in Los Angeles.

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