Kohl’s $8 billion takeover leaves little room for drama

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The six-month-long saga over the fate of Kohl’s Corp. moves towards a conclusion.

The department store chain has entered into a three-week exclusivity period with Franchise Group Inc. on a potential cash offer of $60 per share, valuing the retailer at around $8 billion, the two companies announced on Monday.

Shares of Kohl rose 11% on Tuesday before closing up 8%. But investors shouldn’t get carried away just yet.

For starters, the $60 per share proposal is not eliminatory. This is below the price levels discussed earlier in the process, which ranged between the mid to high $60s.

Of course, the world has changed since the retailer first revealed interest in a takeover in January – and even since last month, when Kohl’s cut its sales and profit outlook. It was the wrong way to encourage a heated auction.

The $60 proposal represents a 26% premium to the stock price on January 14, before activist Macellum Advisors urged the company to change its board of directors or consider a sale. Using Monday’s closing price, the premium is around 42%.

Still, shares of Kohl hit a 12-month high of $63.71 on Jan. 24. Rising to this level would be more acceptable to shareholders. The hurdle is that Franchise Group, with a market cap of just $1.6 billion, is much smaller than the company it’s trying to buy.

Franchise Group said on Monday it intended to raise about $1 billion in capital. The majority of the financing would be debt backed by Kohl’s real estate, possibly through an agreement to sell his property and rent it out. The department store had property, plant and equipment on its balance sheet of $7.8 billion as of April 30.

But it’s a risky time to fund a big leveraged buyout, given concerns about the broader economy. Even if Franchise Group secures financing, it will be wary of overpayments. All of these factors can make buying a sweetener difficult.

Franchise Group has the advantage of having a background in retail, through its brands such as The Vitamin Shoppe and Pet Supplies Plus, although as the name suggests its experience is in the field of franchise.

And although Kohl’s is cash-generating, with free cash flow of $1.6 billion in the year ending Jan. 29, a new owner would face a higher interest rate environment. The history of privatized and indebted retailers is not encouraging. Rival Neiman Marcus’ borrowings, for example, have become so overwhelming in the pandemic that he 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 hit $60 per share on its own. This may make investors more inclined to accept around this 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 any further twists, this department store drama could end in disappointment.

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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.

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