Is there any greater humiliation than this? How many companies announce that they're being acquired at a premium to market price only to see their shares subsequently drop nearly 2%? Did Rodney Dangerfield own this stock?
That's the story today at Linens 'n Things (NYSE:LIN). On the one hand, I can understand a certain amount of pessimism for this stock. After all, not only does it have "n" in its name instead of "and" -- a grievous first strike, in my book -- it's also had nothing to offer investors for quite some time.
Rivals like Bed Bath & Beyond (NASDAQ:BBBY) and even staple-shoveling big boxes like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) mean a pretty high level of competition.
But come on! The offer is for $28 a stub in cash. And the private buyer, the Apollo group, says it's got financing lined up. Finally, the board has voted unanimously for the deal. Shares are currently swapping hands for less than $26, meaning there's a potential for a 7.7% gain. So what's the catch here?
Clearly, someone doesn't think the deal will go down, at least not at this price. That's because the debt financing is contingent on a same-store sales target of no worse than negative 6% for the year and EBITDA (earnings before interest, taxes, depreciation, and amortization) of $140 million. The information I've got from our data providers at Capital IQ shows EBITDA of $54.5 million for the last nine months, meaning the firm's got to score $85.5 million in the final three months of the fiscal year. The firm put up $107.5 million in EBITDA in the final quarter of the prior fiscal year, so this is a goal that's definitely within reach.
But given the really crummy sales numbers of late, the trend doesn't look good. I believe the company could cut expenses drastically and help hit those targets, but what if it doesn't? That's why I can understand why investors would be willing to shed shares today. With a capped upside and a good chance the deal will fall through, the risk here just doesn't stack up well with the potential reward.
For related Foolishness:
Seth Jayson sleeps in old gunny sacks, and therefore, at the time of publication, he had no positions in any company mentioned here. View his stock holdings and Fool profile here. Fool rules are here.
