Wall Street boosted Kellwood Co.'s stock 18.7 percent Monday as analysts praised the St. Louis-based vendor's decision to halt efforts to block Sun Capital Securities Group LLC's $21 a share tender offer.
Kellwood stock gained $3.20 to $20.30 in New York Stock Exchange trading.
Sources said several factors drove Kellwood's change of heart from rejecting the $762 million bid: the firmness of Sun's offer, which is not subject to financing or due diligence; Sun's threat of a proxy contest if Kellwood continued to block the bid, and communication from shareholders.
Lazard Capital Markets LLC said the decision by Kellwood's board, including the removal of a poison pill preventing a single entity from owning more than 20 percent of the company, was an "about-face...in a more constructive direction."
"This leads the way for an acquisition by Sun Capital to be completed on Feb. 12, although Kellwood reserves the right to retain its shark repellent if it believes it can solicit a higher offer," according to a Lazard report.
Lazard pegged the chance of finding a higher offer at less than 25 percent, but acknowledged that Kellwood would seek alternative bids in the next two weeks, including calling back potential acquirers that have contacted Kellwood in the last six months.
"While Sun Capital's offer, under normal conditions, would be considered shrewd and opportunistic, it seems much more reasonable in today's environment," Lazard said in its report. "Shareholders would do well, in our view, to accept Sun's offer."
In addition to letting shareholders decide whether to tender their stock, Kellwood initially rescinded its own $60 million debt tender offer over the weekend, then Monday announced instead that it would extend the deadline for the offer until Feb. 13, the day after Sun's deadline, so the debt tender offer could still stand if Sun's tender offer does not receive support from the majority of shareholders. Sun had threatened to reduce its offer to $19.50 if Kellwood did not withdraw the bond tender offer made earlier this month.
Brad Stephens, a retail analyst for Morgan Keegan & Co. Inc., predicted the deal will go through. "If I were a Kellwood shareholder, I would take the $21 and run," Stephens said. "It's seven times EBITDA for a company with a history of troubles restructuring, and there's companies like PVH and Warnaco that are trading at six times or less of EBITDA."
Although CtW Investment Group, which represents an estimated six million union members who own about 198,000 shares of Kellwood common stock, or less than 1 percent, said it will not recommend that its shareholders tender at $21, it is supportive of Kellwood's decision to start negotiations with Sun and solicit other offers.
"The Kellwood board seems to have finally gotten religion," said Michael Garland, a director at CtW Investment Group. "Most significantly, the board rescinded the bond tender...which is what should have happened long ago if they are going to extract maximum value for shareholders."
Jason Bernzweig, vice president of Sun Capital, issued a statement praising the Kellwood board's decision.
Sun Capital made two proposals this fall to buy Kellwood for $21 a share, and Kellwood immediately rejected both. This month, Sun Capital took the bid to the next level, making a tender offer to shareholders of the same amount. Kellwood had initially told its stockholders to hold off on selling until it could review the offer, and this weekend still said it was not taking a position on whether stockholders should tender their shares.
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