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Plenty to Ponder for Kohl’s as Bidding War Intensifies

Kohl’s Corp. has one tough decision ahead, as ever more suitors emerge.

While the new entrants could be a game changer for Kohl’s in terms of its options, the retailer will have to determine which buyer, if any, makes the most sense for its future. The best offer isn’t necessarily the one that is willing to pay the highest price. For example, last month saw Sen. Tammy Baldwin (D-Wisc.) reach out to the board of directors at Kohl’s urging them to reject buyout offers that would put workers at risk of losing their jobs.

Sources said they believe Kohl’s wants to stay independent, mostly because the management team believes strongly in its turnaround plan for the company.

A report surfaced on Tuesday that Franchise Group has entered the ring, indicating a willingness to bid $69 a share, or $9 billion. Franchise Group operates The Vitamin Shoppe and Buddy’s Home Furnishings, a rent-to-own home goods retailer. The Vitamin Shoppe is a purveyor of nutritional supplements, and was acquired in August 2019 by Liberty Tax, a tax preparation firm. Following the close of the deal, Liberty Tax was renamed Franchise Group. Shortly after the name change, Franchise went on to complete its acquisition of Sears Hometown and Outlet Stores Inc. in October 2019. A few months later in February 2020, Franchise acquired American Freight Group Inc., a discount retail chain in the furniture and home sector.

A spokeswoman for Kohl’s did not return a request for comment.

A Franchise Group spokesman said that the company’s “mandate is to enhance value for its shareholders. As part of that mandate, we regularly evaluate multiple M&A opportunities but typically do not comment on rumors.”

Reuters first reported on Franchise Group’s interest in Kohl’s, citing three unnamed sources, as well as that of private equity firm Leonard Green & Partners, who is leading a consortium that has made a bid. Sources told Sourcing Journal that the consortium includes brand management firm Authentic Brands Group (ABG). Leonard Green is a long-time investor in ABG. Representatives for ABG also declined comment.

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Kohl’s has been on the receiving end of a push from activists looking for quick action to maximize shareholder value. Kohl’s has countered that its reconstituted board of directors, along with the current management team, have been hard at work with its transformation plan. At the retailer’s Investor Day presentation last month, CEO Michelle Gass said that its seen some positive feedback on early trends, such as making the retailer a destination for the active lifestyle space. The department store operator also has inked a few key partnerships. The first is with Amazon for kiosks that handle returns on purchases from the marketplace platform, which has captured customers entering Kohl’s for the first time. Another is with Sephora, which will enter hundreds of Kohl’s doors this year and will feature the beauty retailer’s shop-in-shop concept. Others include Levi Strauss, Lands’ End, Eddie Bauer and Draper James. Kohl’s also plans to launch 100 smaller-format stores over the next four years that have a hyperlocal focus on outdoor apparel. And while Kohl’s has said its plan to re-energize itself will take some time to fully materialize, activist shareholders aren’t keen on waiting for a return on their investments.

The sale process early on caught interest from  Acacia Research, backed by activist investor Starboard Value, which was also behind a $9 billion non-binding offer. Private equity firm Sycamore Partners has also weighed in with its interest, while Hudson’s Bay Co. last month confirmed plans that it would put a package together for Kohl’s.

In the case of Hudson’s Bay, the Canadian operation is said to be keenly interested in Kohl’s real estate assets, which has been valued at $7 billion. That would fit with the background of Richard Baker, who runs Hudson’s Bay. But some sources have expressed concern that Baker might be interested in effecting a plan similar to his split up at Saks Fifth Avenue where online operations were carved out from the brick-and-mortar business. It’s a move that some say would be extremely complicated, given the size of Kohl’s when compared with the much smaller Saks. Furthermore, these sources also indicate that the team at Kohl’s believes that the two operations should remain together, much in the same way that Macy’s had determined that the risks were “too high” if it were to do a  Saks-style split.

Initial non-binding offers earlier this year were in the $64 a share range, but that has moved up to the $69 and $70 range, with Franchise Group at $69 and Hudson’s Bay at $70.

Both Cowen & Co. equity analyst Oliver Chen and retail consultant and former retail analyst Walter Loeb believe Kohl’s should fetch a far higher per-share price tag. Chen’s range is between $75 to $85, while Loeb pegs the per-share price at $85, presuming the Kohl’s leadership team makes good on its game plan. That could prove challenging, however. Credit ratings firm Moody’s Investors Service analyzed the inflationary impact on retail  and concluded that mid-price department stores and apparel retailers are most at risk if inflation stays high. It cited Macy’s and Kohl’s as two examples in the mid-price group that could get impacted, especially if price-sensitive consumers begin trading down to lower-cost outlets.