SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN
PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Check appropriate box:
( ) Preliminary proxy statement
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KMART CORPORATION
(Name of registrant as specified in its charter)
KMART CORPORATION
(Name of Person(s) Filing Proxy Statement)
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(X) * $125 per Exchange Act Rules 0-11(c)(1)(ii),
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( ) $500 per each party to the controversy pursuant to
Exchange Act Rule 14a-6(i)(3)
( ) Fee computed on table below per Exchange Act Rules
14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which
transaction applies:___________________________
(2) Aggregate number of securities to which
transaction applies:____________________________
(3) Per unit price or other underlying value of
transaction computed pursuant to Exchange Act
Rule 0-11:______________________________________
(4) Proposed maximum aggregate value of
transaction:____________________________________
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May 20, 1994
Mr. Tim Culler
Invesco Capital Management
1315 Peachtree Street, Northeast
5th Floor
Atlanta, Georgia 30309
Dear Mr. Culler:
During our conversation last week regarding
Kmart's targeted stock proposal, you referenced Michael
Exstein's research report on our proxy statement as a
source of concern. We felt it would be helpful to
respond to the points raised by Mr. Exstein and provide
some facts and data that we hope you find helpful.
Again, we have every confidence that when you examine the
merits of our proposal you will find that it provides a
clear opportunity to enhance shareholder value.
Following are our responses to each of Mr.
Exstein's major points in the order they are raised in
his research report.
Mr. Exstein's first point is that "the targeted
stock offering is a very complex structure which allows
management a wide degree of discretion." Our response is
as follows:
Although the structure could be
perceived as complex, targeted stock
allows us to gain the following
advantages over a direct stock
offering.
* Lower administrative overhead
* Cheaper borrowing under consolidated credit
* More favorable lease rates and store
locations
* Streamlined governance (one Board)
* Future restructuring flexibility
* Tax efficiency
* Avoids capital gains
* Maintains tax consolidation
* Permits tax-free spin off in the
future
We believe that these advantages will ultimately
allow us to create greater value for Kmart shareholders
than in a direct stock offering.
The nature of the transaction and
subsequent business and accounting
changes will increase management
accountability and business segment
understanding as follows:
* Each business will be accounted for
separately as well as on a consolidated
basis. Therefore, you will know how each
business is independently performing,
including the Kmart Group (discount stores)
as a stand-alone entity.
* Analyst coverage should increase as
analysts track individual businesses
instead of simply Kmart Corporation as a
whole.
The Board already has broad discretion to issue
authorized but unissued shares of common stock
or preferred stock in any transaction in which
they believe it is in the best interests of
shareholders. Therefore, the targeted stock
structure does not meaningfully enhance the
Board's discretion to raise equity; it will,
however, provide the Board with more
alternatives to raise equity should it decide to
do so.
Mr. Exstein's second point, raised numerous
times in his report, is that "this offering does not
represent actual equity of each specialty division ....
This will likely result in a lower valuation to KM than
the direct sale of equity in those divisions." We do not
agree.
An examination of all of the targeted stocks in
the market today indicates that they trade based
on the fundamentals of the underlying business.
Exstein uses USX's targeted stock issuance of
its Marathon Group stock as an example of an
offering "penalized" by its financial structure.
In fact, as the accompanying chart illustrates,
Marathon Group has traded in line with -- often
at the high end of -- industry comparables.
Another accompanying graph demonstrates that
Marathon Group targeted stock traded in tandem
with its peer group until 1992, when the stock
fell in anticipation of a dividend cut. Since
Marathon announced its cut in October 1992, it
has again traded in tandem with the comparables.
Marathon's trading history demonstrates that the
market's treatment of that stock is comparable
to that of a stand-alone integrated energy
company.
We believe that any potential "discount" the
market might apply (again, which the empirical
evidence does not support) will be more than
offset by the advantages referenced above,
including the fact that Kmart would have no tax
liability upon the sale of targeted stock.
Furthermore, many of the administrative costs of
operating a stand-alone public company are also
substantially decreased. We believe these
advantages should drive higher earnings and,
consequently, a higher valuation.
Finally, it should be pointed out that Mr.
Exstein's use of United Technologies as an
example of the potential difficulty our issue
might face is not applicable to the Kmart
targeted stock offering. By Mr. Exstein's
admission, the United Technologies offering is
"not exactly a comparable financial structure."
In fact, the United Technologies proposal is not
by any means a targeted stock offering.
Furthermore, that offering was postponed due to
unfavorable market conditions, not because of
its financial structure.
Third, although Mr. Exstein concedes that
dilution to Kmart's shareholders would be minimal, he
raises concerns that prospective purchasers of a Specialty
Retail Stock "would not be provided any rights
specifically related to their separate series."
Once again, the targeted stocks that have been
issued in the last three years (i.e., USX,
Ralston Purina, Pittston and Fletcher Challenge)
have substantially the same rights as the
Specialty Retail Stock and trade on their
operating fundamentals, not on their structure.
This issue should not be detrimental to a
current holder of Kmart common stock since, as
stated above, these rights will not adversely
affect the market value of the Specialty Retail
Stock.
Mr. Exstein's fourth concern is the Board's
ability to "force the exchange of targeted stock at its
discretion under a predetermined formula."
This feature, which is virtually identical to
the exchange rights contained in Ralston
Purina's and Pittston's targeted stocks, should
be viewed as an advantage to a current holder of
Kmart common stock. This right provides the
Board with more flexibility than a direct
subsidiary offering in determining when and how
to sell a targeted business or undertake a
corporation transaction. It allows the Board to
look at a proposed transaction with a view to
maximizing value for all Kmart shareholders.
Finally, Mr. Exstein notes that the Specialty
Retail Groups will require additional capital to execute
their expansion plans this year and that the proceeds from
the offering will go to Kmart and not the individual
units.
Mr. Exstein fails to note that the
initial balance sheets of the Specialty
Retail Group are virtually free of debt,
substantially all of which has been
attributed to the Kmart Group. Moreover,
the Board's discretion to characterize an
advance to a Specialty Retail Group as a
short-term or long-term loan or as
equity, coupled with the groups' ability
to take advantage of Kmart's consolidated
credit rating, will result in more
readily available and lower cost capital
than would be available to a stand-alone
subsidiary. This benefit, which will be
shared by the Kmart Group through its
retained interest in the Specialty Retail
Group, is a unique advantage of targeted
stock and a major benefit and competitive
advantage for the specialty businesses.
In addition, the Kmart Group's receipt of
the proceeds of the initial offerings is
clearly beneficial to the current holders
of Kmart common stock.
We hope that this response helps address any
concerns raised by Mr. Exstein's report. Based on our
analysis of the benefits of the Entrepreneurially-Led,
Ownership Culture (ELOC) model of retailing we shared
with you, as well as the attractive features of these
offerings, we are convinced that our proposal will
maximize value for all shareholders.
If you have any further questions regarding our
proposal, please feel free to call me anytime at 810-643-
1879 or Tom Murasky at 810-643-1158. We appreciate
Invesco's significant investment in Kmart, and look
forward to unlocking significant value in that investment
through the targeted stock offerings.
Sincerely,
G.R. Mrkonic
<TABLE>
<CAPTION>
USX- MARATHON GROUP
VALUATION
* The following table illustrates that Marathon is currently valued in-line
with its respective comparable companies.
MARATHON COMPARABLES (1)
GROUP MEAN MEDIAN
________ ____ ______
<S> <C> <C> <C>
Price/1993 EPS 17.5x 14.6x 14.7x
Price/1994E EPS (2) 18.4 19.5 17.1
Price/1995E EPS (2) 13.4 16.0 15.9
Firm Value/LTM EBITDA 6.8x 6.6x 6.3x
Market Value/LTM Oper. Cash Flow from 5.3 5.9 6.1
Ops.
Implied Market Value of Reserves:
$/boe $5.97 $6.18 $6.20
After-tax SEC Value 2.36 2.90 3.20
Dividend Yield 4.0% 3.4% 3.5%
<FN>
1 Comparables include Amerada Hess, Amoco, Arco, Phillips and Unocal.
<FN>
2 Earnings estimates as of 5/4/94; prices as of 5/16/94.
</TABLE>
USX- MARATHON GROUP (Trading History)
* USX's Marathon Group stock has traded on its operating
fundamentals since its initial issuance in May 1991.
* A January 1992 offering raised $560 million at trading
multiples that met or surpassed those of comparable companies.
* By mid-1992, however, a downturn in Marathon's business led
the investment community to expect a dividend cut.
* On October 27, 1992, USX announced the well-anticipated dividend
cut on its Marathon Group stock, and since that time, the stock
has performed in parallel to other integrated energy companies
(Amerada Hess, Amoco, Arco, Phillips and Unocal).
[Graph tracking the price of Marathon Group Stock and
a composite of comparable energy companies' stock
(i.e., Amerada Hess, Amoco, Arco, Phillips and Unocal]
