What happened
Shares of Kohl's (KSS 0.96%) jumped 8.2% on Tuesday, after the department store chain said it was conducting exclusive acquisition negotiations with Franchise Group (FRG).
So what
The talks are scheduled to occur over three weeks. Franchise Group intends to use this time to complete its due diligence and arrange financing for the transaction. As it stands, Franchise Group is offering to buy Kohl's for $60 per share, or roughly $8 billion, though the companies stressed that a deal might not be completed.
Under the terms of the agreement, Franchise Group would take on $1 billion in debt to help fund the transaction. The remaining financing would be obtained by leveraging the real estate assets that Kohl's holds.
Franchise Group expects its acquisition of Kohl's to boost its adjusted earnings per share and free cash flow, allowing it to pay higher dividends to its shareholders and conduct additional acquisitions over time. This probably helps explain why Franchise Group's shares rose nearly 5% on the news.
Image source: Getty Images.
Now what
Competition in the retail arena has intensified in recent years. With various discount retailers and e-commerce companies battling for market share, Kohl's has no shortage of threats.
Some Kohl's shareholders have been displeased with management's efforts to combat these challenges. Activist investors, in turn, have pressured the company to find an acquisition partner that could bolster its profitability and improve returns to shareowners.
Franchise Group might be able to do just that. The holding company is focused on buying retail brands, such as in its purchase of The Vitamin Shoppe, and maximizing their free cash flow generation. It then passes on a portion of that cash to investors through a growing dividend income stream.
