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The Boston Globe

Business

How going private helped BJ’s change its game

Kayana Szymczak for The Boston Globe

A California equity firm took BJ’s private last year.

Customers at BJ’s Wholesale Club Inc. stores probably haven’t noticed any big changes in the discount chain’s aisles, but a few months ago a major transformation took place at the Westborough-based company. BJ’s, long publicly traded, left the scrutiny of Wall Street after being acquired by a private equity firm. It took a year and a half to close the $2.8 billion deal, and from the moment it was known BJ’s had a suitor, executives scrambled while employees worried about their jobs. “There were a lot of questions, a lot of anxiousness. We were all tied to our BlackBerrys, Googling who’s who and who’s that,” said Diane Mareira, a general manager at the Northborough store who has worked at BJ’s for 27 years.

This is a behind-the-conference-room-door look at the sometimes tense process that led to the company’s sale.

Just before the July 4 weekend two years ago, Herb Zarkin, chairman of BJ’s Wholesale Club, was surprised to find out that a California private equity firm had acquired 9.5 percent of the merchant’s outstanding stock and wanted to buy it outright.

Five minutes later, Zarkin heard from Jonathan D. Sokoloff, a managing partner at the firm, Leonard Green & Partners, and an acquaintance for more than 20 years.

Shoppers at the BJ’s probably don’t notice the difference, but former chairman Herb Zarkin (above) said new ownership will help the wholesaler expand beyond the East Coast, without shareholder pressure.

Michele McDonald for The Boston Globe

Shoppers at the BJ’s probably don’t notice the difference, but former chairman Herb Zarkin (above) said new ownership will help the wholesaler expand beyond the East Coast, without shareholder pressure.

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“I asked him what happened. Usually, these firms make overtures, build up a relationship behind closed doors, and convince us that shareholders and management are better off if the company goes private,’’ Zarkin said recently in his first comments on the matter. “This was very unusual. It’s almost hostile.’’

Sokoloff explained that Leonard Green in the past had spent a lot of time and energy on backroom negotiations with other companies - talks that ended up going nowhere. This time out, he told Zarkin, Leonard Green saw an opportunity and didn’t want to miss out on it.

“We thought the stock market was not fully appreciating how BJ’s changed its business model,’’ Sokoloff said in a recent interview. “Our hope all along was to buy the company. But if we were not successful, and the stock went up because it was undervalued, or because someone else bought it, we would at least ensure that we had a profitable investment.’’

Wall Street welcomed Leonard Green’s interest - BJ’s stock soared about 18 percent that day to close at $43.54.

BJ’s, a distant third in the bulk-sale consumer goods market behind Costco Wholesale Corp. and Walmart Stores Inc.’s Sam’s Club, had steadily improved operations in recent years under the leadership of Laura Sen. It was in no rush to make a move, and in July 2010, it certainly wasn’t planning to sell to private investors. Most employees had never heard of Leonard Green, but thought they understood what buyout firms did: cut jobs, close stores, and increase debt.

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Zarkin met with the board of directors later that afternoon and spent the next week talking to bankers, lawyers, and other officials. Publicly, BJ’s refused to speculate on the unsolicited bid, and several days passed before Sen sent a companywide e-mail even acknowledging Leonard Green’s investment.

In that message, Sen said: “The most important thing that any of us can do is to continue to provide top quality goods and service to our members . . . and none of us can be distracted from that mission by this activity in our stock.’’

Cornel Catuna, BJ’s executive vice president of club operations, said the leadership team tried to communicate frequently and keep workers focused on store performance, not Wall Street rumors.

“The last thing you want is having 10,000-plus team members worried,’’ Catuna said.

Soon after becoming the second-largest shareholder in BJ’s, Leonard Green partners flew to Massachusetts to meet with Zarkin and several top executives. It was a cordial introduction, but the push to go private was not brought up.

BJ’s officials were taken aback by Leonard Green’s aggressive posture - it had a reputation for privately wooing retailers, from Whole Foods Market to The Container Store, with promises of capital and a hands-off approach.

BJ’s, which had been the subject of takeover speculation for years, decided to maintain its silence after that meeting. It stuck with the strategy even when reports emerged in late 2010 that the company had hired a firm to look into selling the chain, and again in December, when Leonard Green was apparently considering a hostile bid if BJ’s didn’t soon move to put itself on the auction block.

In early January 2011, BJ’s said it would close five of 195 stores, slash nearly 500 jobs, and shuffle senior management. It wasn’t until February 2011 - half a year after Leonard Green made its investment - that the chain confirmed it was considering offering itself on the market.

“I was never concerned or upset that we took our sweet, dear time to make sure we were doing the right thing. We were deliberate from day one,’’ Zarkin, who had served as chairman since 1997, said.

Over the next four months, BJ’s put together a presentation that detailed its five-year plan, invited 23 private equity firms to review the company’s offer memorandum, and went on a road show to meet potential buyers.

“It’s like dating. You like some more than others,’’ Sen said.

Rival Sam’s Club, owned by Walmart, was the only retailer that reached out to express interest but BJ’s refused to negotiate because of antitrust concerns and business risks related to sharing sensitive competitive information.

“You can’t forget later what you saw,’’ Zarkin said.

It was an exhaustive process that Zarkin admits was at times disruptive to employees, some of whom came to his office seeking reassurance.

“There are people who put their lifeblood into this company, people we brought on board recently from other companies, people we made commitments to,’’ he said. “And they’re very much nervous because they don’t know what’s going to happen.’’

Zarkin, 73, said he wasn’t concerned about his own future because he was in the twilight of his career. He understood a buyout could allow BJ’s to expand beyond the East Coast without the pressure of meeting quarterly numbers demanded by Wall Street. BJ’s could also get the capital it needed to make long-term investments while avoiding the harsh scrutiny of banks, analysts, shareholders, and others.

By June, Leonard Green was the only party still interested in buying BJ’s. It eventually made a formal bid of $50 per share. After several days of negotiations, Leonard Green - along with funds advised by CVC Capital Partners - agreed to increase the offer to $51.25 per share in cash. The deal, unveiled one year after Leonard Green first made its investment in BJ’s, represented a 38 percent premium to the closing price of BJ’s shares on June 30, 2010.

That day, Sen opened a bottle of Moet & Chandon at work, sharing the bubbly with Catuna and other executives. In a recent interview, she said the chain will continue to prosper and gain insight on how to do things better from Leonard Green and its portfolio of successful retailers, which include Sports Authority, Petco, and J. Crew. The private equity firm’s imprint on BJ’s, however, has yet to become visible in its first few months of ownership.

“It was never our house,’’ Sen said, referring to BJ’s. “It was the shareholders’.’’

BJ’s executives celebrated the end of their long journey off Wall Street over dinner at Blue Ginger restaurant in Wellesley last fall when the deal closed and held a retirement party for Zarkin at BJ’s headquarters.

“Change is what’s happened. If you’re not adaptable, you really will not do well,’’ Zarkin said. “We demonstrated that we’ve made the company so great because we’re adaptable. We’re very proud of BJ’s. Members love it, shareholders love it, and obviously someone loved it even more. They gave us $51.25 a share.’’

Jenn Abelson can be reached at abelson@globe.com. Follow her on Twitter @jennabelson.

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