Ticker Symbol KSS
Kohl’s shares are up over 12% in morning trading as the company said it has entered exclusive talks with The Vitamin Shoppe owner Franchise Group to be acquired at a potential price tag of $8 billion. The company, who has been in merger and acquisition talks for the better part of the past year, currently trades at $47, or a 27.6% discount to the stated offer price of $60 per share. The companies have entered a three-week period to negotiate the final terms and price of the acquisition.
Franchise Group also said that the company is working with Oak Street Real Estate to fund the deal via Kohl’s real estate portfolio. There is no guarantee that a deal will be reached. The exclusive period would provide both the Franchise Group and its financing partners with sufficient time to complete their due diligence process on Kohl’s financials and operations.
The discount retailer had been publicly urged by activist investor Engine Capital to seek a sale of the business to generate shareholder return in December of last year. Kohl’s Chief Executive Officer, Michelle Gass, was initially resistant to the idea, arguing that the company could generate higher long-term profitability with the existing management. Further pressure from other activists such as Macellum Advisors pressured the company into finally hiring Goldman Sachs to field offers for the sale of the business in February.
Kohl’s initially rejected an offer from Acacia Research to acquire the company at $64 per share before Russia’s invasion of Ukraine. That offer valued the company at approximately $9 billion, higher than the current bid from the Franchise Group. The sharp fall in the equity market, compounded by negative commentary from other discount retailers such as Target and Walmart, has now made the business less attractive to potential acquirers.
The company also reported first quarter earnings that missed Wall Street estimates and it also cut its’ guidance for the rest of the fiscal year. The retailer posted adjusted earnings per share of 11¢, widely missing the expected 69¢, and said it saw adjusted EPS for the year to be around $6.45 to $6.85 per share, down from its previous estimate of $7 to $7.50 a share. The company’s shares have a 52-week high of $64.38.
The current 27.6%, or $13 per share, discount to the possible acquisition price does offer savvy investors the potential to arbitrage between the present market price and the stated acquisition price. Depending on the way the deal is structured, if the deal goes through and is approved by the board of both parties, shareholders and regulators, investors could walk away with a $60 cash offer for every share they own. However, the acquisition price could be adjusted down, or the two companies could walk away without finalizing a deal, in which case Kohl’s share price may revert to pre-acquisition levels.
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