KSS - Buyout Rumors but lots of uncertainty

Kohl’s has just reported receiving several takeover bids from two private equity firms all in the range of mid $50s to $60 a share. (Hence the jump in share price during after-hours today (06/02/2022). Here is the text of the WSJ article about this Article:

Kohl’s Corp. KSS 2.44% received takeover bids from private-equity firm Sycamore Partners and retail holding company Franchise Group Inc., FRG -0.69% according to people familiar with the matter.

Sycamore’s bid values the Wisconsin department-store chain in the mid-$50s a share, while Franchise Group offered around $60, some of the people said, equating to around $7 billion or $8 billion. Kohl’s KSS 2.44% stock closed Thursday at $41.18.

Other details of the bids for Kohl’s, which has been entertaining takeover interest for months, couldn’t be learned, including whether anyone else submitted one.

The Kohl’s board is expected to meet to review the bids in the coming days, the people said. There are no guarantees Kohl’s will be receptive to a deal or that one will come together. Should a deal come together, it would likely still be several weeks away, the people said.

Kohl’s, which has said it was exploring strategic options, recently defeated an activist investor’s attempt to overhaul its board. Shares of the company have fallen 17% so far this year, pressured by a broader market selloff.

Kohl’s shares rose nearly 8% in after-hours trading Thursday after The Wall Street Journal reported on the bids.

The Wall Street Journal reported in March that Kohl’s was attracting interest from Sycamore as well as Canada’s Hudson’s Bay, parent of Saks. Hudson’s Bay has since decided against bidding, a person familiar with the matter said.

Reuters previously reported that Franchise Group was among the suitors for Kohl’s.

Weeks ago, Kohl’s had indicated to suitors that it believed the company was worth at least $70 a share, though the market conditions for retailers have worsened since then, with weak earnings reports by Target Corp. and Walmart Inc. that hit their shares. Financing for leveraged buyouts has also become more difficult as a result of market turmoil.

Kohl’s had been struggling before the pandemic. Its operating margin fell to 6.1% in 2019 from 11.5% in 2011, while its sales were little changed. Then the coronavirus pandemic hit, taking a big toll on sales and wiping out profits in 2020.

Sales and profits rebounded in 2021, but by January 2022 the retailer’s stock was worth less than it was two decades ago.

Merger activity has slowed in recent weeks as rising interest rates and market volatility make it more expensive and trickier to get deals done. Financing deals in the notoriously volatile retail industry can be particularly tough given that lenders need to be confident about future cash flows.

Kohl’s buyers would likely look to monetize its real estate holdings, which have drawn interest from investment firm Oak Street Real Estate Capital LLC, people familiar with the matter have said.

New York-based Sycamore focuses on consumer and retail investments. In 2020 it agreed to purchase Ann Taylor, LOFT, Lane Bryant and other chains out of Ascena Retail Group Inc.’s bankruptcy and owns other companies including Staples Inc., Express and The Limited.

Franchise Group acquires and manages mainly franchise companies, including the Vitamin Shoppe, Pet Supplies Plus and Buddies Home Furnishings among other brands.

There’s still lots of uncertainty ahead hence the relatively muted price action. For what it’s worth, Kohl’s has received higher offers just earlier this year so it probably won’t be the best idea to go full ape into calls.

In march, they rejected a buyout for $64 a share as they deemed it too low. Source

There have also been rumors of several other buyouts with prices in the 60s but I’m not able to find a good source for them.

However, the macro conditions have only gotten worse and there is a lot of pressure on Kohl’s from activist investors to consider a buyout. What this tells us though, is that there is still a lot of interest in acquiring Kohl’s for a significant premium even in light of Kohls’ recent awful earnings results. We should get some more details in the coming days.

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Price went up afterhours today (06/06/2022) after WSJ released an article stating that Kohl’s was in advanced talks to be acquired for 8 billion (~$62.27 a share). Article text below:

Kohl’s Corp. is in advanced talks to be sold in a deal that could value the department-store chain at roughly $8 billion, according to people familiar with the matter.

The Wisconsin company recently entered exclusive talks with retail holding company Franchise Group Inc., the people said. The exclusivity period is expected to last for several weeks, so a deal isn’t imminent, and there still may not be one.

Franchise Group, which owns brands including Vitamin Shoppe and Buddies Home Furnishings, had offered around $60 a share for Kohl’s, The Wall Street Journal reported last week. It has been vying for the company in competition with private-equity firm Sycamore Partners, which put in a bid in the mid-$50s a share.

The stock closed at $42.12 Monday.

Also, this is not a great sample size but someone on r/spacs did an analysis to find out how accurate bloomberg rumors were to predicting a DA (definitive agreement) for spacs and the phrases “in advanced talks” and “nearing a deal” in an article resulted in a successful deal 100% of the time. Small sample size tho and relating to spacs which are much smaller deals.

Reddit DD: https://www.reddit.com/r/SPACs/comments/lskaqb/bloombergs_spac_rumor_accuracy_rate_and_other/

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Thanks for this anonyman! Took a small position is my only regret. I may pick up more tomorrow after that wsj article. Congrats on the promotion, well deserved

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Some more news yesterday from a tabloid (New York Post) stating that the CEO of the Franchise group is strongly committed to the deal and has no intentions of renegotiating the price of $60 per share.

The big unknown is whether he will be able to secure financing and it looks like Wall Street is quite pessimistic on that part. Also some concerns that the talks might go over the 3 week period originally set out for a deal.

Again, it’s the New York Post so not necessarily the gold standard of reliable journalism.

Source: Vitamin Shoppe owner doubles down on $8B Kohl's buyout: source

So the CEO capped. It looks like Franchise group is having second thoughts about the deal. Hard to see this deal going through at around $50 a share. Another reason why it’s best not to put much stock in an article published by a tabloid.

Source: https://www.cnbc.com/2022/06/22/franchise-group-considers-lowering-kohls-bid-closer-to-50-a-share-from-60.html

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Looks like Kohl’s terminated their deal talks. Also the stock got suspended this morning just now at 7am… Don’t know what is up.

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