Kohl’s Corp. is playing hardball.
The department store retailer on Friday rejected buyout offers that “do not adequately reflect the company’s value in light of its future growth and cash flow generation.” It also adopted a shareholder rights plan, or “poison pill,” a tactic commonly employed to discourage hostile takeovers.
Friday’s developments are the latest volleys in weeks of a back-and-forth brouhaha pitting voracious investors against the Menomonee Falls, Wis.-based retailer.
Kohl’s last month received “letters of interest” from deep-pocketed potential acquirers. Acacia Research, backed by activist hedge fund Starboard Value, leads a consortium that offered $9 billion, or $64 a share in cash, to acquire the retailer, according to Securities and Exchange Commission documents. Private equity firm Sycamore Partners—which owns Belk, Talbots and Hot Topic—also reportedly offered to acquire Kohl’s at $65 a share.
Still other investors have urged Kohl’s to go the way of Saks and break its stores and e-commerce into standalone businesses.
For now, Kohl’s said its board remains committed to “maximizing the long-term value of the company and will review and pursue opportunities that it believes would credibly lead to value consistent with its performance and future opportunities.”
“We have a high degree of confidence in Kohl’s transformational strategy, and we expect that its continued execution will result in significant value creation,” Kohl’s chairman Frank Sica said. “The Board is committed to acting in the best interest of shareholders and will continue to closely evaluate any opportunities to create value.”
Jonathan Duskin, managing partner at hedge fund Macellum, which is seeking to shake up the retailer’s board, was “shocked” and “disappointed” by Kohl’s “hasty” rejection.
The rebuff “only validates for us that a majority of the Board is entrenched and lacks objectivity when it comes to evaluating value-maximizing sale opportunities relative to management’s historically ineffective standalone plans,” he added, voicing “doubt that interested parties were given adequate consideration or access to management, data rooms and the type of information required to inform upward adjustments to bids.
“Moreover, it appears that the Board has not authorized its bankers to canvass the market and initiate substantive conversations with other logical suiters,” Duskin said. “Even if some of our fellow shareholders want the Board to compare sale opportunities to management’s go-forward strategy, we fear the Company’s actions and statements demonstrate a lack of impartiality and strategic thinking in the boardroom.”
Adopting a poison pill, set to expire in February next year, could help Kohl’s deter strong-arm takeovers. These plans effectively waters down the potential acquirer’s ownership while restoring power to existing shareholders and boards. They also reduce the likelihood that a company will sell for less than its fair value, forcing activists to negotiate with the board instead of other shareholders.
A poison pill can buy Kohl’s more time to figure out the best path forward. Rejecting first offers is a negotiating tactic to get current bidders to raise their offering price. That becomes a game of hardball to see which player blinks first. But boards and advisors who believe the potential acquirer can be a bad fit for the company will also use the poison pill to buy time to find a so-called “white knight” aligned with the board’s strategic vision. That’s often the case when activist investors are involved. They have a reputation for trying to kick up shareholder value and then exiting their investment after getting the bump up in share price, leaving the company to deal with the headaches that are left over, such as–more often than not—an over-leveraged balance sheet.
Companies have in the past adopted these plans, but many did away with them because of criticism that they entrench existing boards and management. These days the plans go into effect for a limited time.
Several fashion companies have recently put poison pills into play. Chico’s FAS, Ascena, Tailored Brands, Express and Footlocker Inc. all enacted poison pills, either because of active acquisition interest or other incentives.
Kohl’s said the poison pill plan gives it time to conduct an “orderly review of the expressions of interest,” and allows the board to consider other offers that fully recognize the “value of the company.” The company’s March investor update will dive into further details.
Kohl’s hired PJT Partners and asked Goldman Sachs to engage with interested parties.
Splitting clicks and bricks? Just say ‘no’
If separating stores from their digital businesses is retail’s curious new trend, Gil Harrison and Stuart Weitzman aren’t getting on board anytime soon.
Speaking Monday at the virtual launch party for his “Deal Junkie” autobiography, Harrison, a seasoned investment banking veteran, voiced his opinion that bricks and clicks “have to go together.”
Harrison, chairman emeritus of the Financo Inc. boutique investment firm he founded in 1971, readily acknowledged that many have made a “great deal of money” by successfully “capitalizing” digital retail companies. But breaking into two like Saks Fifth Avenue has just might not make sense in the long run.
Retail needs a physical and a digital presence, according to Harrison, now chairman of New York-based consulting firm Harrison Group. “You have to be multi-channel, and this question of inventory [include issues of] people buying on e-commerce and being able to return to the stores,” he said.
Some investors are hoping to replicate Saks’ financial maneuvering at Kohl’s. “One of the reasons why Kohl’s [Corp.] is in play right now is they want to try to break it up,” Harrison said. “I think that people have felt for a while the Kohl’s has been undervalued. I think they probably are one of the best of the remaining department stores in their field. They’ve done things that even Macy’s hasn’t done.”
Weitzman echoed his disapproval of the interest in dividing a retailer’s two main channels.
“You know, one feeds the other, but certainly many retail businesses would disappear if e-commerce wasn’t still part of the organization,” said the footwear designer and founder of namesake label Stuart Weitzman. “In a few years we’ll know how successful [these splits are]. But [just to] be a retailer and not in e-commerce. I don’t see it.”
E-commerce “became like the biggest store we had in America and the biggest store in Europe and the biggest floor in China” during Weitzman’s last years with the brand. “They fed off each other,” he said.
Cowen on Kohl’s
Cowen & Co. retail and luxury analyst Oliver Chen on Tuesday doubled down on his outlook around a Kohl’s leveraged buyout.
The “possibility of a sale-leaseback remains uncertain, leading some to believe that the deal may be challenging to secure,” he wrote. “Overall, sentiment is mixed regarding the potential Kohl’s takeout, but a majority of investors believe a deal could be completed over the initial offer price and that a sale leaseback of $2 billion-$3 billion would be needed to acquire Kohl’s. Regarding the potential for another offer, incoming feedback is split between believing another bid may materialize or not.”
Chen believes there is a 20 percent to 30 percent chance a deal succeeds at $64 to $65 a share, and or a 30 percent to 40 percent chance at $75 or higher.
Kohl’s largely off-mall footprint “remain[s] meaningfully attractive to a multitude of investors given the retail sector shift to off-mall for better traffic trends and convenience for shoppers,” he added. The retailer estimates its real estate portfolio value at $7.8 billion, and Chen speculated that the stores could sell for $10 million to $14 million apiece, depending on location and traffic. Distribution centers remain attractive because they are in limited supply, and Kohl’s owns “12 of their 15” such facilities, including e-commerce fulfillment centers,” he added.
Editor’s note: This article was updated at 1:45 p.m. on Feb. 4 with Macellum’s response.