Leonard Green & Partners, the Los Angeles buyout firm, signed a definitive agreement to buy K mart Corp.'s PayLess-drugstore chain for more than $1 billion in cash and securities.

The deal is subject to financing, and much of it is expected to come from commercial banks.

Among the banks believed to be in contact with the buyout firm are Bankers Trust, Citibank, Chemical Bank, and Bank of America.

Bankers Trust and Citibank are investors in Leonard Green's new equity fund, and have led past deals for the firm. Sources said Chemical and Bank of America may also become investors in the new fund, which hasn't closed yet.

Could Approach $800 Million

In a statement Thursday, Leonard Green said the purchase price would include $592 million in cash, and the assumption or refinancing of $170 million of PayLess debt.

If the debt is refinanced with new bank loans, the total size of the bank deal could approach $800 million.

It's possible, though, that the buyout firm could tap the public debt market or other funding sources for some of the necessary financing.

A spokeswoman for the buyout firm said it's premature to discuss how the deal will be financed.

So far, Leonard Green's talks with the banks have been only preliminary, but negotiations are expected to begin in earnest now that a definitive agreement has been signed.

As reported, the buyout firm signed a letter of intent to buy the drugstore chain in late October, following a lengthy auction process. K mart put the chain up for sale in August.

Leonard Green is buying PayLess through TCH Corp., the parent of Thrifty Corp., a Los Angeles-based drugstore chain. TCH is controlled by an investment partnership managed by the buyout firm.

In addition to Thrifty, which has 494 outlets in California, TCH also owns Bimart Corp., a discount-drugstore chain.

Has 572 Stores

PayLess, based in Wilsonville, Ore., operates 572 stores throughout the western United States.

Sales of the combined PayLess, Thrifty, and Bimart entity are expected to total about $4.7 billion in 1994.

As part of the purchase price, Kmart will get a 47% common equity stake in TCH, as well as $100 million in subordinated debt.

The purchase is expected to be completed by the end of the first quarter of next year.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.