After what I can only imagine was a long weekend spent reading salesforce.com CEO Marc Benioff's book Compassionate Capitalism, Pier 1 (NYSE: PIR) head Alex Smith came to a conclusion: It's time to do some good. And so this morning, Pier 1 bid $4 a share to acquire struggling Cost Plus (Nasdaq: CPWM), to save its rival from certain financial doom.
Or so Pier 1 would have you believe.
In a press release issued Monday, Pier 1 laid out its arguments for why "paying" 0.6 Pier 1 share per 1.0 outstanding share of Cost Plus was a good deal for the latter's shareholders. Some of the arguments hold water. Others ... not so much. Herewith, a deconstruction of a few of Pier 1's key arguments:
"Given our similar customer bases and broadly similar business models ... we believe Cost Plus is an excellent fit with Pier 1 Imports."
No doubt. Both companies hawk cheap, foreign-made home furnishings, and assorted "fun" domestic kitsch. To this extent, the merger seems a match made in heaven.
"We are confident that combining our two companies would create a stronger and more competitive company."
I doubt that a combined Pier 1/Cost Plus will be giving the sales staff at Bed Bath & Beyond (NYSE: BBBY), Target (NYSE: TGT), or Williams-Sonoma (NYSE: WSM) night sweats. Still, to the extent that merging a competitor makes the surviving company "more competitive," this Pier 1 assertion also rings true.
But put on your antispin suits, Fools, for now we delve into the realm of wishful thinking ...
"We believe the combination will result in improvements in Cost Plus's operating margins."
Maybe, maybe not. Pier 1 drags out the usual laundry list of "synergies" used to justify mergers of similar companies: "supply chain management, shared services, store operations and other general administrative costs." I'm sure there's fat to be trimmed in each store. But at the same time, I can't help but notice that over the past year, Pier 1's operating margin has averaged negative 5%, and that Cost Plus edges out Pier 1 with only 4.6% negativity.
"Cost Plus shareholders will enjoy significant benefits from the combination, including improved operational liquidity of the combined company as well as a more active trading market for their shares."
OK. Now we're in la-la-land. Take a cue from Morningstar, guys, and quit pandering to the day traders.
"Absent a transaction, Cost Plus is likely to face increasing liquidity problems."
To paraphrase an old saw: People who live in poorhouses shouldn't throw stones. Sure, Cost Plus is in dire straits, free cash flow-negative and carrying nearly $160 million in net debt. But it's not like Pier 1 is some fountain of wealth.
Pier 1 highlights its "committed $450 million asset-based lending facility" as the foundation of its own "sound financial condition." But the company already carries more than $180 million in long-term debt on its balance sheet, and burned through $90 million in cash last year.
"We are confident that Cost Plus shareholders would prefer a combined company focused on long-term growth and profitability rather than a stand-alone Cost Plus preoccupied with simply reaching positive cash flow."
And now we're back in no-doubt-land. I'm sure Cost Plus shareholders would prefer to own such a company. Unfortunately, it's not Wal-Mart (NYSE: WMT) that is offering to buy Cost Plus. Pier 1's sales have dropped three years running. And unlike Cost Plus, which posted positive operating cash flow in four of the last five years, Pier 1 has done what it's promising to do for Cost Plus in only two of its own last five fiscal years.
I honestly don't see how merging a usually cash flow-negative company with an occasionally cash flow-negative company results in consistent positive cash flows. Or how a company with falling sales (Pier 1), plus a company with stable-to-rising sales (Cost Plus), helps the latter more than the former. But I'm just a simple Fool. Seeing as how Pier 1 is in a compassionate mood, maybe management will take pity and explain this to me.
Foolish takeaway
Unless and until they do, my opinion is this: Cost Plus shareholders, Pier 1 has just given you the gift of a 15% stock price bump. Take it and sell your shares. Don't buy into the hype.
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