Buyout speculation has swirled around Kohl's (KSS 1.11%) this year, encouraged by a pair of activist investment firms that are frustrated with the stock's subpar returns. However, Kohl's quickly rejected the initial offers it received, saying that they undervalued the company.
Now, though, the likelihood of a successful deal appears to be rising. At least four potential acquirers are circling Kohl's, which could spark a bidding war that would drive up the deal price to a level that the retailer's board can't turn down.
Initial offers were too low
Acacia Research -- an affiliate of hedge fund Starboard Value -- was the first Kohl's suitor to emerge in 2022. In January, it reportedly offered to buy the department-store giant for $64 per share. Within days, private-equity firm Sycamore Partners expressed a willingness to beat Acacia's bid with an offer of at least $65 per share.
Neither of these proposals held much appeal for Kohl's board. The company posted adjusted earnings per share (EPS) of $7.33 for its recently completed 2021 fiscal year, so both offers valued the company at less than nine times earnings -- a steep discount to the broader market.
To be fair, like many retailers, Kohl's benefited from demand exceeding supply last year. This allowed it to cut back on discounts to improve its gross margin to unusually high levels. Moreover, department stores have struggled to deliver consistent sales growth for nearly a decade. That said, management expects EPS to exceed $7 again in fiscal 2022 and to grow at a high-single-digit annual rate thereafter.
While Kohl's stock may not be worth 15 or 20 times earnings, it wouldn't make sense to sell the company for just $65 per share. As a result, the board "determined ... that the valuations indicated in the current expressions of interest which it has received do not adequately reflect the Company's value in light of its future growth and cash flow generation."
More bidders enter the mix
Despite rejecting the initial expressions of interest in January, Kohl's and its investment bankers have continued to engage with potential buyers over the past two months. That culminated in a new round of offers last week. In addition to Acacia Research and Sycamore Partners, private-equity firm Leonard Green & Partners and department-store holding company Hudson's Bay are bidding for the company.
Image source: Kohl's.
In a press release on Monday, Kohl's said that all of the offers it received were non-binding and lacked committed financing. However, Kohl's and its bankers are working with the company's suitors to provide additional information so that they can line up financing and (hopefully) raise their bids.
Hudson's Bay now looks like the front runner, according to The New York Post. The Toronto-based department-store conglomerate might be willing to pay more than private-equity firms because it sees Kohl's as a strategic investment. For example, it's interested in bringing the Kohl's concept to Canada. Hudson's Bay also sees opportunities to better capitalize on the value of Kohl's real estate and its growing e-commerce business.
Will this be the spark needed to complete a deal?
Kohl's has told bidders that it thinks its shares are worth over $70. The recent round of bidding may not have produced an offer at that level, but with four possible acquirers kicking the tires, there's a good chance that some of Kohl's suitors will raise their bids after getting access to more confidential information about the company's performance.
If any bidder is able to raise its offer to $75, I would expect Kohl's board to accept the offer. While Kohl's stock could be worth even more in a few years if the company's strategic-growth initiatives succeed, the board has to consider the risk that these growth plans don't pan out. An ongoing activist campaign by Macellum Advisors has only added to the pressure on the board to do something.
Kohl's stock closed at $60.65 on Wednesday. At that price, investors could make a quick profit if the company sells itself in the next few months. The current share price also leaves a lot of upside over the next few years if Kohl's stays public and its growth plans succeed. That makes Kohl's stock a very attractive investment opportunity.
