Home decor superstore At Home Group agreed to be acquired by private equity firm Hellman & Friedman on May 6, but now that $2.8 billion all-cash deal might be in jeopardy.
On Monday, At Home’s largest shareholder CAS Investment Partners said a letter to the board expressed that it was “extremely disappointed” that its stated concerns regarding the proposed sale were being ignored. Essentially, the investment firm thinks the purchase price is undervalued and it plans to vote against the transaction “as currently structured.”
The $2.8 billion deal at $36.00 a share represents a 17 percent premium to the $30.67 a share closing price on May 4. CAS believes a more “realistic valuation of the company would be $70 per share or more.”
The CAS letter said the valuation suggests a regression back to a 2019 fiscal year scenario, despite some business improvements since then and expected long-term growth. One big difference highlighted by CAS was the lack of an online platform in 2019 versus today, calling the e-commerce presence a “robust one” where customers can order online and arrange for in-store pick-up or direct delivery. It also cited At Home’s Insider Perks loyalty program, which grew from zero members in August 2017 to 2.6 million at the start of fiscal year 2021 and rose to 9.1 million members by year-end.
CAS isn’t the only investor that is planning on voting against the planned sale. Last week Honest Capital LLC sent its letter to the At Home board stating it intends to vote against the sale. The financial firm called the $36-a-share amount “grossly inadequate.” It believes that the company should get a higher valuation for near- and long-term earnings potential due to strategies put together by the management team. The letter cited an increase in market share, strong housing and home décor markets, as well as the retailer’s ability to capitalize on an expected retail boom in the second half of 2021, as reasons for a more optimistic outlook and basis for a higher valuation.
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Both investors cited the company’s ability to grow to over 600 store from 225 currently and management’s long-term view of reaching $6 billion in annual sales, with $10 million in average revenue per store, most recently affirmed by management in its fourth quarter earnings call on March 24.
So, what happens now?
Usually, investor letters like the two sent by CAS and Honest Capital serve as negotiating tactics for At Home and Hellman & Friedman to come back to the table with a higher offer. That bargaining is a tactic to create more shareholder value.
How much more, and what’s actually considered a more fair valuation is yet to be determined. And it might not be that much higher for a company that has been trying to sell itself since early 2019.
Exactly two years ago, Reuters reported that Kohl’s was interested in acquiring the home retailer. While nothing came of that, what is known is that At Home had already been marketing itself nearly since the start of 2019, and one of the parties it held talks with was Hellman & Friedman. Last year’s pandemic put a hold on most retail mergers and acquisitions, except in the case of bankruptcies.
In the case of At Home, there’s a chance company projections eventually may prove correct. But there’s plenty of room for hiccups along the way to derail expected consumer spending in the home sector. And with supply chain challenges and the lack of containers for bigger items such as furniture, there could be more headwinds putting a damper on investor hopes.