By Tonya Garcia
Kohl’s Corp. stock soared 36% in Monday trading to buck a highly negative market trend, after the department store retailer confirmed that it had received buyout offer.
The Wall Street Journal first reported talk of a takeover, writing that a consortium backed by Starboard Value LP proposed a deal valued at $9 billion. Kohl’s confirmed receipt of an offer on Monday and said the company “will determine the course of action that it believes is in the best interests of the company and its shareholders.”
Acacia Research Corp, which is controlled by activist hedge fund Starboard Value LP, confirmed late Monday that it made a $64-per-share cash offer.
Activist investor Macellum Advisors GP LLC, which owns nearly 5% of Kohl’s stock, issued a letter early Tuesday urging Kohl’s to add a Macellum representative to the retailer’s board. The group also said its earlier encouragement for Kohl’s to explore strategic alternatives has been “validated” by the current offer.
“Though we believe Kohl’s could be a source of significant value with a significantly refreshed Board, improved execution and an optimized balance sheet, we feel the best risk-adjusted path forward for shareholders right now is a credible and open process to evaluate a full sale of the Company at an attractive premium,” Jonathan Duskin, Macellum managing partner, wrote in a note.
“Candidly, we do not have faith in the current Board to run this process on its own, nor do we believe the Board is capable of objectively evaluating possible bids relative to its historically overly optimistic assessments of management’s standalone plans.”
Investors may be upbeat about the offer, but UBS analysts are skeptical it would happen as described. The research group maintained its sell stock rating and $38 price target.
“The key is we believe it could be challenging for the investor group to get financing for two reasons: 1) We doubt Kohl’s real estate has enough value to serve asadequate collateral. 2) We don’t believe an operational turnaround plan exists which will convince creditors to lend enough capital to make the deal happen,” analysts led by Jay Sole wrote.
UBS estimates the average value of each of Kohl’s 409 stores at $6 million to $8 million, with few “hidden gems” in the bunch.
“UBS Evidence Lab data and our work suggest Kohl’s owns few stores in high-value real estate markets, such as Manhattan,” the note said.
“We attach a $0.8 billion to $1.9 billion valuation to Kohl’s distribution centers and headquarters. Importantly, our $3.25 billion to $5.00 billion valuation is really only applicable to a sale/leaseback strategy. A hypothetical real estate developer buying a Kohl’s asset in order to repurpose it would likely value the property at a 20% to 25% discount because of the numerous costs and challenges of repurposing retailreal estate.”
Analysts also think the retailer will continue to lose market share, mostly to off-price retailers like TJX Cos. /zigman2/quotes/203136811/composite TJX +2.36% , Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +1.57% and other brands.
Cowen analysts maintained their outperform stock rating and raised their price target to $75 from $73.
“Cowen gives 60% to 70%-plus likelihood of deal closing if financing is secured through a $3 billion-plus sale leaseback, a $2 billion of equity contribution and a 3.0X leverage ratio; alternatively, if a sale leaseback does not occur, a deal may require a 4.0X leverage ratio, holding the $2 billion equity contribution constant,” analysts led by Oliver Chen wrote.
Cowen thinks the retailer’s turnaround “is on the right track,” citing the Sephora partnership and other initiatives, but results would take more time.
Kohl’s released a comment to that effect on Jan. 18 following a statement from Macellum that said leadership is “materially mismanaging” the company.
“Based on our performance in 2021, we are positioned to exceed our key 2023 financial goals two years ahead of plan,” the letter said , also noting the Sephora partnership as well as a refreshed board and other initiatives.
“We remain confident in our future and have accelerated our share repurchase activity.”
The news sent shares of other department stores up during Monday trading . Macy’s Inc. /zigman2/quotes/201854387/composite M +2.89% shares rose 18% and Nordstrom Inc. /zigman2/quotes/203902116/composite JWN +2.67% was up 13%.
Macy’s has faced its own activist investor pressure, with activist investors Jana Partners LLC encouraging the company spin off its e-commerce business . Cowen analysts have estimated the enterprise value of that business at $11.5 billion.
Kohl’s stock slipped 0.6% on Tuesday, but has run up 41.4% over the last year while the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.08% has gained 12.5% for the period.