A tidal wave of shareholder opposition yesterday swept away Kmart Corp.'s plan to raise $600 million to $900 million by issuing new stock tied to the performance of its specialty store units, despite the company's last-ditch efforts to win support.
The defeat was an embarrassing setback for Kmart's management, which has been under increasing pressure from shareholders unhappy with its inability to rejuvenate the company's flagship discount store business.
The opposition's victory took Wall Street, the company and even the leaders of the dissident shareholders by surprise and came in spite of Kmart's last-ditch efforts to get out the vote by extending the balloting deadline by eight hours.
"I think all the people who worked on this are stunned that the company couldn't get the votes it needed," said Michael R. Zucker, director of the Amalgamated Clothing and Textile Workers Union's office of corporate and financial affairs. The union owns a small number of Kmart shares.
The dissident shareholders, led by James Severance, executive vice president of the State of Wisconsin Investment Board, have argued that Kmart should spin its specialty stores off completely so that management can focus its attention on reviving the chain of discount stores.
The proposal, which would have offered the public the opportunity to buy stock that reflected the performance of Kmart's specialty store units, received the support of 61 percent of the shares voted. But under Michigan law, it needed the approval of more than half of the 416 million shares outstanding.
In a statement issued last night, Joseph E. Antonini, chairman, president and chief executive of Kmart who had personally lobbied hard on behalf of the proposal, said the company was disappointed in the outcome. He noted that the proposal was defeated in large part because 27.8 percent of the shares outstanding were not voted.
Mr. Antonini said management and the board would begin assessing alternatives to unlock the value of its specialty store FTC units -- its office and building supply chains, as well as its book and sporting goods chains -- whose performance and growth prospects are overshadowed by Kmart's flagging discount store business.
The stock market, sensing the defeat, bid Kmart's shares up to $16, up 50 cents, perhaps in part because the vote sounded a clear wake-up call to the company's directors and management.
"I think it may be a blessing in disguise because it tells management that its strategies are being questioned in a strong enough voice to smack them in the face," said Thomas H. Tashjian, a retail analyst at the First Manhattan Co.
"Antonini's future will also become more of an issue here over the course of the next period," he added. "Is he going to be willing to concede to administering a program different from the one he envisioned?"