(Bloomberg Opinion) -- The six-month long saga over the fate of Kohl’s Corp. is heading toward a conclusion.
The department-store chain has entered into a three-week exclusivity period with Franchise Group Inc. on a potential $60 per share cash offer, valuing the retailer at about $8 billion, the two companies said late Monday.
Kohl’s shares rose as much as 11% on Tuesday before closing up 8%. But investors shouldn’t get carried away just yet.
For a start, the $60 per share proposal is no knockout. It’s below the price levels mooted earlier in the process, which ranged from the mid to high-$60s.
Of course, the world has changed since the retailer first revealed takeover interest in January — and even since last month, when Kohl’s cut its sales and profit outlook. That was hardly the way to encourage a heated auction.
The $60 proposal represents a 26% premium to the share price on Jan. 14, before activist Macellum Advisors urged the company to alter its board or explore a sale. Using Monday’s closing price, the premium is about 42%.
Still, Kohl’s shares reached a 12-month high of $63.71 on Jan. 24. Getting up to this level would be more palatable to shareholders. The hurdle is that Franchise Group, with a market capitalization of just $1.6 billion, is much smaller than the company it is trying to buy.
Franchise Group said on Monday that it intended to contribute approximately $1 billion of capital. The majority of the funding would be debt backed by Kohl’s real estate, possibly through a deal to sell its property and lease it back. The department store had property and equipment on its balance sheet of $7.8 billion at April 30.
But this is a risky time to be funding a big, leveraged buyout, given concerns about the broader economy. Even if Franchise Group does secure the financing, it will be wary of overpaying. All these factors may make it hard to afford a sweetener.
Franchise Group has the advantage of having retail experience, through its brands including The Vitamin Shoppe and Pet Supplies Plus, although as the name suggests, its experience is in franchising.
And while Kohl’s is cash generative, with free cash flow of $1.6 billion in the year to Jan. 29, a new owner would face a higher interest-rate environment. The history of retailers that were taken private and loaded with debt is not encouraging. Rival Neiman Marcus’s borrowings, for example, became so overwhelming in the pandemic that it filed for Chapter 11 bankruptcy in 2020.
Given the darkening consumer backdrop, as well as an industry-wide inventory backlog, Kohl’s will likely struggle to get to $60 a share on its own. That may make investors more inclined to accept around that level — unless another party emerges. Private equity group Sycamore Partners also submitted a proposal for the retailer last week alongside Franchise Group, the Wall Street Journal reported.
Without another plot twist, this department-store drama could end in disappointment.
To contact the author of this story:
Andrea Felsted at [email protected]
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