Kohl’s has some tough decisions ahead.
The Menomonee Falls, Wis.-based department store retailer on Monday confirmed it received “letters expressing interest in acquiring the company,” the latest development in months of activist agitation pressuring the chain for a wide-ranging shakeup.
Numerous players have entered the fray.
Acacia Research, backed by activist hedge fund Starboard Value, is behind a consortium that offered $9 billion, or $64 a share in cash, late last week to acquire Kohl’s for a 37 percent premium to the retailer’s $46.84 closing share price Friday. Nearly two days later, Bloomberg reported that private equity firm Sycamore offered $65 a share for Kohl’s, a 39 percent premium.
Investors on Monday bid Kohl’s share price up more than 30 percent into the $62.50 range, and Cowen Equity Research analyst Oliver Chen believes $75 to $85 per share might be possible.
Activist investors are especially interested in the chain’s real estate assets, which they value around $7 billion. Many expect a deal for Kohl’s would involve not just bank financing but use of its real estate holdings, too. Arcadia reportedly has a real estate firm in mind to handle the real estate sales. The Wall Street Journal first reported on the Arcadia offer.
In a research note published Monday, Chen said a sale financed through a $3 billion series of sale-leaseback deals would have a 60 to 70 percent chance of success.
Meanwhile, Engine Capital Management’s letter urged the Kohl’s board to “create a competitive sale process that will maximize shareholder value” and “pursue such a process immediately,” citing the company’s $7 billion in real estate holdings and “tremendous free cash flow.” It accused the chain of “significantly underperform[ing] the S&P 500 and its peers over most relevant time periods,” a trend that’s lasted for more than 13 years, it said, pushing Kohl’s to sell itself.
Engine in December called on Kohl’s to tease out its high-growth digital business from stores or else put itself up for sale, a “scorched earth strategy,” according to Forrester analyst Sucharita Kodali. Shortly after, hedge fund Macellum Capital Management piled on with renewed calls for a board refresh. Macellum first started its fight in February last year, agitating in tandem with Ancora Holdings, Legion Partners Asset Management and 2010 Capital. That resulted in new directors from both camps joining Kohl’s board. Word surfaced in December that Macellum was planning to revive its board-overhaul agenda. Earlier this month, the activist firm once again took aim at the chain, accusing Kohl’s management of “materially mismanaging the business.”
Kohl’s fired back by claiming it has continued to engage with the activist firm and that its strategic plan transforming the company into a “leading omnichannel destination for the active and casual lifestyle continues to gain traction.” Kohl’s pointed to third-quarter results showing that net sales outperformed at up 16 percent on strong digital and store performance.
Chen on Monday believes a sale “may realize value for shareholders more quickly than Kohl’s as a stand-alone public company.”
“Kohl’s board will need to evaluate all value maximization opportunities for all shareholders,” he said.
Chen believes “management is on the right track given agile strategies, including the Sephora partnership, continued focus on the active segment, and new brand rejuvenation, particularly in women’s apparel,” he said. Activists, however, might not be interested in waiting around to see when a slow-going turnaround bears fruit.
Then there’s the sale-leaseback angle. Former retail consultant Walter Loeb has long opposed retailers selling their valuable real estate assets., citing Starboard Value’s 2015 efforts to force Macy’s to sell off some holdings back in 2015 that didn’t go anywhere and culminated with the hedge fund ditching its shares in 2017.
Loeb says sale-leasebacks add burdensome overhead rent costs to a retailer’s balance sheet. Moreover, real estate gives retailers critical wiggle room in the event of an economic downturn. They can use these physical assets to cushion against a difficult cycle.
Financial engineering isn’t always in retail’s best interest. Hedge fund boss Eddie Lampert’s Sears Holdings takeover seemingly accelerated the once-storied retail empire’s downfall, leaving just 26 Sears stores and six Kmart locations operating to ring in 2022.
Kodali questions the benefits of a Kohl’s sale. “Usually employees will be worse off but investors typically are happy,” she said. “It’s not exactly stakeholder capitalism but it is capitalism for sure.”
Additional reporting by Jessica Binns.