Buyers enter a Kohl store in Peoria, Illinois.
Daniel Acker Bloomberg | Getty Images
A little-known conglomerate of companies, including The Vitamin Shoppe, Pet Supplies Plus, and a home furnishing chain called Buddy’s, is suddenly starting to talk in the retail industry.
Franchise Group, a publicly traded business with a market capitalization of about $ 1.6 billion, has entered into exclusive sales negotiations with Kohl’s. He offered $ 60 a share to acquire the retailer at an estimated $ 8 billion. Franchise Group and Kohl’s are in a three-week window through which the two businesses can confirm any due diligence and final financing arrangements.
Since then, questions have been circulating about what all this will mean for Kohl’s if a deal is reached: What will happen to Sephora’s beauty stores within Kohl’s or the retailer’s return partnership with Amazon? Will Kohl CEO Michelle Gus remain in the company? Is it inevitable to close stores?
Also, why would the Franchise Group want to own Kohl’s in the first place, as retailers, including Kohl, are facing challenges and stock inflation? Just a few weeks ago, Kohl’s cut its fiscal forecast for the entire fiscal year as more Americans withdrew at discretionary spending. Meanwhile, investors are struggling with rising Federal Reserve interest rates and the potential for recession in the near future.
The deal is still ongoing, so these questions have no firm answers at this time. Instead, analysts and experts point to the Franchise Group’s achievements and recent acquisitions to give a better idea of Kohl’s future.
Speakers at Franchise Group, Sephora and Amazon did not immediately respond to requests for comment on the story. Kohl’s declined to comment.
What Franchise Group wants
“What the Franchise Group is doing is looking for good business and well-known, strong brands with good customers,” said Michael Baker, senior research analyst at DA Davidson.
“And then they have a different strategy on how to capitalize or how to generate revenue from these acquisitions,” he added. “Sometimes that turns them from corporate stores to franchise stores.”
The Franchise Group was founded in 2019 through a $ 138 million merger between Liberty Tax and Buddy’s, according to the company’s website.
Under the leadership of President and CEO Brian Kahn, who has experience in private equity, the Franchise Group continued to grab the Sears retail business; Vitamin Shoppe; American Freight, which sells furniture, mattresses and appliances; Pet supplies Plus; Sylvan Learning; and Badcock, a home furnishings chain that serves lower-income households.
Vitamin Shoppe store in New York.
Scott Mill CNBC
Franchise Group is mainly engaged in franchise ownership. But the consensus is that Cannes is unlikely to use the same strategy at Kohl’s, which has more than 1,100 stores in 49 states.
“The strategy would be to work with the current management team to manage [Kohl’s] better or change leadership if necessary, “Baker said.” They did this with some of their assets. … Cannes has experience in making good deals. “
Baker used the latest acquisition of Badcock by the Franchise Group, a deal worth about $ 580 million, as an example. Since then, the company has entered into two different sales agreements, one for Badcock’s stores and the other for its distribution centers, corporate headquarters and additional real estate, to generate a total of about $ 265 million. Rob Burnett remains President and CEO of Badcock.
In a call for profits in early May, Franchise Group’s Kahn told analysts – without calling Kohl’s directly – what he was looking for in each transaction.
“Management is always the key for us,” he said. “Whether we make very small or very large transactions.”
“We have a lot of conviction in the brands we operate with now,” Kahn said during the conversation.
He added that all past acquisitions of Franchise Group generate a lot of money to maintain the company’s dividend and allow further mergers and acquisitions, and all transactions it considers in the future will also have to meet this model. .
Real estate game
Earlier this year, Kohl’s found that the $ 64 share offer from Starboard-backed Acacia Research was too low. At the end of May, the retailer’s shares were trading at $ 34.64 and were less than $ 64.38 at the end of January. Shares of Kohl closed at $ 45.76 on Wednesday.
Franchise Group probably sees its $ 60 per share offer as something of a theft, especially if the company can finance most of the real estate transaction.
The Franchise Group said in a press release earlier this week that it plans to invest about $ 1 billion in the Kohl deal, all of which is expected to be financed through debt rather than equity. According to someone familiar with the matter, Apollo is listed as a provider of term loans to the Franchise Group. An Apollo spokesman did not immediately respond to CNBC’s request for comment.
Meanwhile, most of this deal is expected to be financed through real estate. CNBC previously reported that the Franchise Group was working with Oak Street Real Estate Capital on a so-called sale and leaseback deal. Oak Street declined to comment.
If it develops in this way, Franchise Group will receive an inflow of capital from Oak Street and will no longer have Kohl real estate on its balance sheet. Instead, there will be rent payments and lease payments.
As of January 29, Kohl’s owned 410 locations, leased another 517 and operated land contracts for 238 of its stores. All of his real estate was valued at just over $ 8 billion at the time, according to annual records.
“If the Franchise Group manages to extract $ 7 billion or $ 8 billion from real estate, they pay only about $ 1 billion in assets. So it’s pretty cheap, “said Susan Anderson, a senior research analyst at B. Riley Securities. “I think too [Kahn] he would not have made the deal unless he had already arranged the sale and already had agreements. “
On-site guide
But some retail experts are pouring cold water on the plan, saying such a significant sale of real estate could lead to a much weaker financial position for Kohl’s.
“This is completely unnecessary and will only serve to weaken the company and limit the investment needed to revive the business,” said Neil Saunders, managing director of GlobalData Retail. “The takeovers of other retail companies that have followed this model have never ended well for the party that has been taken over.
Of course, some sales and leaseback deals, and especially those on a much smaller scale, are considered successful.
In 2020, Big Lots struck a deal with Oak Street to raise $ 725 million from selling and leasing four of the company’s distribution centers. This gave the big retailer extra liquidity near the start of the Covid-19 pandemic.
Also in 2020, Bed Bath & Beyond completed a sale and lease deal with Oak Street, which sold about 2.1 million square feet of commercial real estate and raised $ 250 million in revenue. Bed Bath CEO Mark Triton touted the deal at the time as a move to raise capital to invest back in the business.
According to Vincent Keintick, an analyst at Stephens, the Franchise Group can see Kohl’s as a way to create greater efficiency in the backend, among all its other businesses. Combining resources such as performance centers and supply providers could be a smart move, he said.
“They have furniture stores, a rental store, and many of them deal in consumer goods,” Kaintik said. “Maybe they can gain extra pricing power by becoming a bigger player.”
At the same time, he said, it will be the Franchise Group’s largest acquisition to date, which could come with a steeper learning curve.
All of Franchise Group’s retailers together generated $ 3.3 billion in revenue in the 2021 calendar year. Kohl’s total revenue exceeded $ 19.4 billion in the 12-month period ended January 29.
“Franchise Group has a history of buying businesses, attracting them and then releasing capital very quickly to pay off that debt,” Kaintik said. “They have a game book.”
But, he added, the companies Franchise bought before pursuing Cole were much smaller – “And they were made when it was very cheap to get debt.”
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