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Shopko Sale/Leaseback Puts Spirit on Map

The $815.3 million sale/leaseback deal between ShopKo Stores Inc. and Spirit Finance Corp. announced this morning is a watershed event for both firms--positioning ShopKo to pursue aggressive expansion plans while bolstering Spirit as a growing force in the net lease market.

The deal is the first major move by ShopKo management since it took the discount retailer private last year. The company, which owns 135 ShopKo stores and 216 Pamida stores in the Midwest, was taken private in a $1.3-billion deal with Sun Capital Partners Inc. late last year. ShopKo has proven to be a stubborn competitor in the discount sector, holding its own against Wal-Mart in its markets, in part by opening its own super-sized concepts.

This transaction, which covers 112 ShopKo stores and 66 Pamida locations, gives the company the cash to explore expansion and remodels. Details of that strategy will be revealed in coming months, according to a company spokesperson. But it is likely that the firm will look to expand beyond its existing regional base.

The deal also raises the profile of Arizona-based Spirit, a net lease financer and investment firm that was formed in 2003 and went public as a REIT in late 2004. Including the current transaction, Spirit has closed $2.5 billion in deals since its formation. Ultimately, it's goal it expand to 10 times its current size, the company says.

"Our vision is to have $20 billion or more on our balance sheet over time,” says Christopher Volk, president and CEO of Spirit. "This is the first of what we believe will be many large transactions.” Volk says the strategy will be to pursue large-scale corporate real estate capitalizations.

The deal will be structured under two master leases—one covering ShopKo stores, the other Pamida’s. The ShopKo lease is for 20 years while Pamida’s are for 15. Under the terms of the deal, ShopKo will reorganize its operations into three units—ShopKo Stores Inc., ShopKo Stores Operating Co., LLC and Pamida Stores Operating Co., LLC. Spirit will purchase 100 percent of the outstanding stock of ShopKo Stores Inc. Spirit is financing the deal through new facilities provided by Citigroup Global Markets Realty Corp. and Barclays Capital Real Estate Inc.

Spirit was founded by Volk and Morton Fleischer, who previously founded Franchise Finance Corporation of America in 1979. He served as chairman and CEO until the company was sold to GE Capital for $2.1 billion in 2001. In fact, five of Spirit’s six senior entire executive officers formerly served under Fleischer at FFCA.

A battle to take over ShopKo raged for much of 2005. Originally, it reached a deal with Goldner Hawn Johnson & Morrison in April to be bought for $24 per share. But Sun Capital later came in and beat out Golder Hawn, raising the price to $29 per share.

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