Kohl’s Corp. has received at least two takeover bids in the past few days, triggering a sharp spike in the retailer’s stock price on Monday.
The Menomonee Falls, Wisc.-based, value retailer acknowledged Monday morning that it has received letters expressing interest in acquiring the company. The company saw its stock soar over 36 percent, or $16.87, as a result to close at $63.71, up from Friday’s closing price of $46.84.
“The Kohl’s board of directors will determine the course of action that it believes is in the best interests of the company and its shareholders,” the company said in response to an inquiry on the bids. “Shareholders are not required to take any action at this time.”
Kohl’s also said in its response that the company “does not intend to further comment publicly on these matters unless it determines it is in the best interests of shareholders to do so.”
Kohl’s did not specify who the bidders were but Acacia Research Corporation, which is controlled by activist hedge fund Starboard Value LP, confirmed late Monday in a filing with the Securities & Exchange Commission that it offered to acquire 100 percent of the outstanding shares of Kohl’s for $64 per share in cash.
Acacia’s chief executive officer, Clifford Press, stated in the filing that Kohl’s is “an attractive company” and that Acacia was interested in participating in a productive, private dialogue regarding a transaction.
Reuters and The Wall Street Journal over the weekend reported about the bid, valued at $9 billion, and had the financing for a deal. Other media reports that followed indicated that Sycamore Partners, a private equity firm that includes Belk, Loft, Express, Hot Topic, Ann Taylor and other retailers in its portfolio, was also bidding for Kohl’s.
According to a Cowen Inc. research report issued Monday, the potential bid at $64 “appears very modest based on Cowen’s leveraged buyout returns analysis. A transaction would likely require monetization of $3 billion of real estate via a sale leaseback. We believe other strategic/financial bidders are possible and model potential upside to $85 plus.”
Cowen said it gives a 60 to 70 percent likelihood of a deal closing if financing can be secured through a $3 billion-plus sale leaseback, a $2 billion equity contribution, more or less, and a three times leverage ratio; alternatively, if a sale leaseback does not occur, a deal may require a four times leverage ratio holding the $2 billion equity contribution constant.
“A transaction may realize value for shareholders more quickly than Kohl’s as a stand-alone public company,” Cowen reported. “Kohl’s board will need to evaluate all value maximization opportunities for shareholders.” But Cowen also expressed confidence in Kohl’s management, stating, “We believe management is on the right track given agile strategies including the Sephora partnership, continued focus on the active segment and new brand rejuvenation, particularly in women’s apparel.”
Cowen pointed out that Starboard’s $64 a share bid represented a 37 percent premium to Friday’s closing price, but a more modest 19 percent premium to the 52-week average price.
Bankers said that could tee up more private equity deals, where big players use their financial might to swoop in and make their move, sparking a new round of dealmaking.
Last Tuesday, Macellum Advisors sent a letter to shareholders criticizing Kohl’s for losing market share, for having insufficient expertise on its board, and describing 2021 as “a lost year” for the retailer. Macellum also indicated that the Kohl’s board had rebuffed a couple of takeover bids, but it’s not clear whether those were bids from Starboard or Sycamore.
Kohl’s for months has been under pressure from activist shareholders to change its board composition, pursue strategic alternatives including possibly selling the company or cashing in on its real estate holdings, improve its performance and increase value for shareholders.
Kohl’s has responded to the activists by arguing back, stating that its board has the right mix of expertise and fresh perspectives; that its strategy to be the leading omnichannel destination for the active and casual lifestyle continues to gain traction, and that Macellum’s letter was “filled with unfounded speculation.”
Macellum has also been pushing Kohl’s to consider splitting up its brick-and-mortar stores and e-commerce businesses into separate companies, which is what the Hudson’s Bay Co. has already done with its Saks Fifth Avenue, Saks Off 5th and Hudson’s Bay divisions, and what Macy’s Inc. is also being pushed to consider by Jana Partners. The separation strategy is controversial, with some industry experts thinking it’s only good for short-term profits and not necessarily good for companies, their customers and shareholders in the long term. However, activists buzzing around retail for some time are guided by a branch of retail mathematics with a one divided by two equals three kind of reasoning. That’s apparent at Macy’s, where the argument is that if the retail and e-commerce businesses were separated, the whole would get more credit from investors and be worth more.
The action on Kohl’s lifted share prices in the department store sector overall, despite the plummeting stock market. Nordstrom Inc. rose 12.9 percent, or $2.59, to $22.59, while Macy’s Inc. increased 18 percent, or $4.13, to $27.07.
With contributions from Evan Clark