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Apollo Scoops Up Michaels: An Artsy-Crafty Strategy for Investors


Mar 03, 2021 by Marc Rapport
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Crafty buyers find Michaels Stores a great place to find bargains, but whether the company itself is one remains to be seen.

The Michaels Companies (NASDAQ: MIK) is being sold to investment funds managed by affiliates of Apollo Global Management (NYSE: APO) for $22 per share "in a transaction that values Michaels at an equity value of approximately $3.3 billion (for a transaction valued at $5.0 billion)," Michaels said today in a press release.

That's far less than the $6 billion Bain Capital and Blackstone paid for the company in 2006 when they took it private. The company went public again in 2014 at $17 per share and, according to today's press release, is now "the largest specialty provider of arts, crafts, framing, floral, wall decor, and seasonal merchandise for Michaels and do-it-yourself home decorators."

Those wares move through more than 1,275 Michaels stores in 49 states and Canada as well as the websites Michaels.com and Canada.michaels.com. And they've moved a lot of stuff. In December, the company reported a third-quarter 2020 net sales increase of 15.1% to $1.406 billion, along with a comparable store sales increase of 16.3% and e-commerce growth of 128%.

Fourth-quarter and year-end results were expected to be announced yet this week, but the earnings call has been canceled.

Buying the store for a premium price

While retail as a whole has suffered greatly before and then even more during the pandemic, forcing closures and bankruptcies by the score, Michaels is one of those exceptions, and the new buyers must be optimistic about its prospects.

The company's press release notes the $22 per share purchase price is a 47% premium to the closing stock price on Feb. 26 -- "the last trading day prior to press speculation about a potential transaction involving Michaels" -- of $15 per share and a 78% premium to the 90-day volume-weighted average price.

Michael's stock was trading right around $22 a share late Wednesday afternoon, including hitting a 52-week high of $22.30 after falling as low as $1.00 a share for its 52-week low.

Michaels said the offer was unsolicited and the result of the company's strong performance during the pandemic, a transformation strategy the new owners said they'll continue to pursue.

A go-to destination that got a lot of gelt from the bank

Andrew S. Jhawar, senior partner and head of Apollo's Retail and Consumer Group, said in the Michaels press release: "Michaels is the go-to-destination in arts and crafts for the deepest breadth of assortment with best-in-class customer service. We believe there is a significant opportunity to enhance the Michaels brand, store experience, and omnichannel offering to its customers across North America."

Apollo is financing the deal with equity from Apollo-managed funds and debt financing from seven major banks.

"Apollo will have plans, but given the premium they have paid for Michaels, it is vital that they make the company work on both the top and bottom lines," Neil Saunders, managing director of GlobalData, told Retail Dive. "Given the dynamics of the sector, this cannot be just a financial play. There needs to be a strategy to boost revenue and not just to cut costs."

Apollo's big day and the Millionacres bottom line

Apollo had a big day. The giant investments manager also bought the operating company of The Venetian, which includes the resort, the connected Palazzo resort, and the Sands Expo and Convention Center, for $2.25 billion.

Now it's also betting on Michaels, which did well during the pandemic by being the go-to for millions of customers sitting at home with time on their hands -- hands that many didn't let sit idle but instead indulged their crafty side with purchases at the company's ubiquitous stores or at its website, which includes such popular portals as Boredom Busters.

By taking Michaels private, Apollo is doing the opposite of what's happening at another iconic arts and crafts retailer that also has thrived during the plague. The equity owners of JOANN, operator of 855 stores in 49 states, have filed with the SEC their plans to take that Ohio-based operation public in a $100 million IPO.

You can go your own way, but what these deals have in common is major money seeing opportunity in some basic retail that combines a large brick-and-mortar presence with growing online sales. Success on their part will help keep the rent flowing for the owners of all that commercial real estate these two stalwarts occupy.

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Marc Rapport has no position in any of the stocks mentioned. The Motley Fool recommends The Michaels Companies. The Motley Fool has a disclosure policy.