INVESTMENT FIRMS EYE BJ'S AS NEXT ACQUISITION TARGET

VICKI M. YOUNG

NATICK, Mass. - BJ's Wholesale Club here has become a target of leveraged buyout firms, as several heavy hitters within the investment and real estate sectors have been conducting extensive due diligence on the No. 3 warehouse club operator.

Industry sources said private equity firms Bain Capital Partners and Kohlberg Kravis Roberts & Co. are in discussions with real estate firm Vornado Realty Trust over a joint bid for BJ's. The three are said to have been circling BJ's since before Thanksgiving.

Should the three firms bid for BJ's, it won't be the first time they've joined forces. Earlier this year, Toys "R" Us agreed to be purchased by Bain, KKR and Vornado in a $6.6 billion transaction, with each party owning an equal share of the toy retailer.

Meanwhile, Kimco Realty, a real estate investment trust like Vornado, is also said to be interested in BJ's, which is concentrated in the Northeast but also has stores scattered down the East Coast.

BJ's, according to financial and real estate sources, was shopped around earlier this year. German retail operator Metro was among those contacted as a possible buyer, but the company passed on the opportunity. Sam's Club, the membership club division of Wal-Mart Stores, Bentonville Ark., and a direct competitor of BJ's, was also approached. Sources said Sam's also passed, but has since resurfaced as a possible contender.

BJ's is an ideal leveraged buyout candidate, analysts said. It owns 38% of its real estate, has no debt and lists over $150 million in cash on its balance sheet. Shares of the company's stock have been pulling back in the last few months, creating a lower-valuation scenario, and company performance has been below management's expectations. Its focus on fresh foods and smaller packaging has helped the warehouse club compete with supermarkets, as well as stake a claim in markets where there is neither a Sam's Club nor a Costco, its other key competitor.

"We think BJ's is a good candidate for private equity involvement," said Neil Currie, analyst with UBS, New York, in a research report initiating coverage of BJ's stock last week. "Valuation is relatively low and earnings are below peak."