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Will Activist Investors Get Last Laugh in Kohl’s Sale Saga?

Kohl’s exclusive bidder appears to putting together a war chest to get a deal done.

Though Buddy’s Home Furnishings owner Franchise Group reportedly has secured the financing it needs to move forward with buying Kohl’s, some question whether a sale is in the department store chain’s best interest.

A CNBC report says Franchise Group lined up some financing with Apollo to make good on its $60-per-share offer for Kohl’s in a deal valuing the retailer at $7.74 billion. Executives at Apollo, which reportedly would contribute just a portion of the financing, could not be reached for comment.

Franchise said on Monday that it plans to throw in $1 billion of capital through debt and finance the rest of the deal by monetizing Kohl’s real estate assets.

In December, activist investor Engine Capital kicked off a firestorm when it urged Kohl’s board to sell the company or break up clicks and bricks to unlock value. It also pegged Kohl’s property value at $7 billion, though others said it could be worth as much as $8 billion.

Retail expert Susan Anderson believes Franchise could follow the same playbook it used for its November acquisition of Badcock, a home furnishings company. That means it could sell Kohl’s properties in exchange for store leasebacks, the B.Riley Securities analyst wrote in a research note. This scenario fits with Franchise’s mission of acquiring cash-flow-generating companies.

Kohl’s has seven distribution centers, five e-commerce fulfillment centers, 410 retail stores and ground leases for another 238, on top of corporate headquarters, she pointed out.

Most retailers avoid sale-leasebacks if they can because the ensuing rent burden weighs on their bottom line, and without physical assists to barter, they’re ill prepared to navigate a downturn. Sears and its accompanying sibling companies stand as one of the most notorious sale-leaseback failures, with the once-storied nameplate now a shell of its former self after filing for bankruptcy.

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Meanwhile, CNBC cited Oak Street Real Estate Capital as the company that could acquire Kohl’s properties. A spokesman for Oak Street and its parent Blue Owl declined comment. Should Franchise succeed under the current scenario, Kohl’s would be a relatively inexpensive acquisition. That’s because Franchise would be on the hook for just the $1 billion of debt financing, and still reap the benefits from the strong cash flow generated from the retailer’s operations.

Oliver Chen believes a “deal is more likely than not,” pegging the chance of crossing the finish line at 40 percent. But the Cowen luxury and retail analyst said the agreement could fizzle out if Franchise fails to work out the sale and leaseback details with an interested third party.

What’s more, if Franchise closes the Kohl’s deal, it could structure the business as a franchise operation, “in which case we see more risk as franchising softline retail can be incrementally more challenging,” Chen said.

Franchise executives could not be reached for comment by press time.