KMART FINDS BUYER FOR BLUELIGHT.COM.

Byline: Brent Hopkins Staff Writer

WESTLAKE VILLAGE - Kmart Corp. announced a blue light special on its own BlueLight.com Wednesday, as it entered into an asset purchase agreement to sell the Internet service provider to United Online Inc.

Launched three years ago, the San Francisco-based wholly-owned subsidiary boasts 165,000 subscribers to its no-frills, $8.95 monthly service. Originally a high-profile joint venture with Yahoo! Inc. and Martha Stewart Living Omnimedia Inc., the service turned into a major drain on Kmart Corp.'s finances.

``For Kmart, it's good - they were losing a lot of money of that,'' said Ulysses Yannas, an analyst for New York brokerage firm Buckman, Buckman & Reid. ``This was an operation that was draining more than $100 million annually. If you want to turn a company around, you have to look at what's losing money.''

Though companies that burn through cash at that rate usually don't make for an attractive investment, analysts said the deal makes sense for a pure Internet service provider like United. While the online service proved to be a burden for a retailer like Kmart, United could absorb the smaller BlueLight with ease. And by adding the 165,000 users, it would grow its 1.7 million base of paid subscribers by close to 10 percent.

``United is positioning itself as the leader of the value segment, so this gains them market share,'' said Youssef Squali, a media communications analyst for investment bank First Albany Corp.'s New York office. ``And as they grow bigger, they can spread themselves across a larger base, which helps margins. The question mark is how much they're paying and how many paying subscribers they'll get.''

BlueLight would offer no specifics on the deal, but Dave Karraker, the firm's vice president of corporate communications, said that all subscriptions are paid. Analysts speculated the price range would be under $8 million. Karraker said the ISP won't come cheaply.

``You have to have a $1 million good faith deposit before you can place a bid, so unless you've got a million bucks in your pocket, you can't come and buy us,'' he said. ``If you do have it laying around, though, we'd love to talk.''

Though the two companies have the agreement, bankruptcy law requires additional bids and an auction before the deal can be completed. Other firms have until October 4 to make offers, and while United Online's initial agreement gives it an advantage, Squali said they may not win out in the end.

``Ultimately, Kmart and the bankruptcy court are interested in the highest bid, so it's not a slam dunk,'' he said. ``But there's not that many people who'd be interested, so it'll probably boil down to a battle between United and Earthlink, if they get involved.''

Earthlink, who competes with giants AT&T Broadband and America Online, did not comment on whether it would make a bid. And aside from releasing a statement saying it had entered into the agreement, United Online refused requests seeking comment. Karraker said the two firms were working together, however, to ensure no interruption in service if the transaction goes through.

`'We want to convey that we're working very hard and closely with United Online,'' he said. ``If they're the winning bid, we'll assure that our subscribers have no lapse in service or change (in) their e-mail address.''