Price/Costco To Spin Off Real Estate -- Move Could Ease Clash Of Corporate Cultures

In a move that could eliminate what some outsiders see as a clash of corporate cultures, Price/Costco Inc. said it will spin off its nonretail real-estate operations, about a third of its assets, to a new company.

The announcement also amounts to a split in executive ranks that began with last year's merger of Price Co. and Costco Wholesale.

Robert Price, now Price/Costco chairman, will become chief executive officer of the new entity, to be called Newco. Jim Sinegal, former CEO of Costco Wholesale, will remain CEO at Price/Costco. The company did not say whether or not Price will retain the chairman's job or his board membership at Price/Costco.

The spinoff apparently separates some aspects of Price Co. and Costco that worked better before the merger than after.

"Certainly Price had a different philosophy about real estate," said Linda Morris, an analyst at PNC Bank in Philadelphia. "Price owned a lot of nonretail real estate, and real estate and retail do not mix.

"Many analysts who followed Price were concerned" before the merger that Price's real-estate assets would be a drag on the combined company's wholesale warehouse clubs, she said.

In its announcement, Price/Costco said that after last year's merger, "certain philosophical differences developed with respect to the two businesses regarding management strategies. Rather than try to create one culture and set of priorities applicable to disparate businesses," the company decided to separate the two business lines.

Sinegal and Price were quoted as saying the proposed spinoff "will allow each of us to more autonomously pursue our areas of interest and should allow for a more efficient utilization of the diverse management skills within the company."

Six Price/Costco directors who were named by Price Co. when the merger took place last year will join the Newco board, and four of them will resign from the Price/Costco board.

Price/Costco said the spinoff will be accomplished through an exchange offer allowing Price/Costco shareholders to trade their shares for an equal number of shares in Newco. Final approval by the board is expected in the next several weeks, and the transaction is expected to close before the end of 1994.

About 27 million shares of Newco will be offered. Price/Costco has about 217 million shares outstanding. That suggests the company believes only about 10 percent to 15 percent of its shares will be tendered.

If the offer is oversubscribed, the company said Newco shares will be given to all interested shareholders on a prorated basis.

If the offer is undersubscribed by 20 percent or more, Price/Costco said it intends to distribute the balance of Newco shares as a dividend to remaining Price/Costco shareholders.

Newco will be left with Price/Costco's commercial real estate, four warehouse properties that will be leased by Price/Costco, 51 percent interests in the company's Mexican operations, some international rights and an electronic catalog. Newco also will get office space for its operations in San Diego.

Price/Costco stock was up 93.75 cents to $15.625 in late trading.

Analyst Michael Exstein of Kidder, Peabody & Co. raised his rating on the stock to "trading buy" from "neutral" and said the spinoff will "narrow the focus of the company" and remove underperforming assets from Price/Costco's balance sheet.

The company said that for accounting purposes it will treat the spinoff as a disposition of assets with a one-time charge of about $230 million, reflecting the difference between the book value of the assets being spun off and the market value of Price/Costco stock the company will acquire.

The assets to be transferred were valued at about $617 million on the company's books on May 8.

Information from Bloomberg Business News is contained in this report.