Michaels and private equity firm Apollo Global Management on Wednesday said that they have entered into a definitive merger agreement, where Apollo affiliates have agreed to acquire the crafts retailer for $5 billion, in a transaction that values Michaels at about $3.3 billion.
The deal will be financed through a combination of equity from Apollo-managed funds and debt financing to be provided by Credit Suisse, Barclays, Wells Fargo, RBC Capital Markets, Deutsche Bank, Mizuho and Bank of America, according to a press release.
Michaels' board has unanimously approved the deal, which is expected to close in the first half of its fiscal year. The retailer has 25 days to "solicit, evaluate and potentially enter into negotiations with" other suitors, and has the right to terminate the agreement if there's a better offer.
The pandemic has been unkind to retail in general, but has ignited sales for craft stores like Michaels and Joann. Michaels has also enjoyed strong demand in non-crafting categories like jigsaw puzzles and toys, according to GlobalData Managing Director Neil Saunders.
The success has piqued investor interest and spurred activity. Last month, for example, Joann filed a proposed $100 million initial public offering that would maintain its private equity owner's majority stake.
Now it's Michaels' turn. Its would-be owners are poised to benefit from not just the crafting vogue, but also improvements in e-commerce and bulking pricing that have made it more competitive with Amazon and other rivals, Saunders said in emailed comments.
"While demand may drop back a bit in 2021, the crafting market will remain elevated compared to where it was pre-pandemic," he said. "And, as such, Michaels' new owners, Apollo, will be able to take advantage of this as they look to grow the company's top line. Apollo will also benefit from the recent investments Michaels has made in its online proposition, including services like curbside collection and same-day delivery. Arguably, having a solid e-commerce and multichannel operation should have been in play years ago. However, the pandemic has forced Michaels' hand and we believe that its online inventiveness and investments will pay dividends well into the future."
The proposed debt, which is common in takeovers by private equity firms like Apollo, casts a shadow, however. High levels of debt and steep management fees under private equity ownership have interfered with the turnovers at several retailers, leading many to bankruptcy court. The long-term debt in the Michaels-Apollo deal will "require an uncomfortable level of interest payments," at a time when competition is stiff and stores require investment, Saunders warned.
"Apollo will have plans, but given the premium they have paid for Michaels it is vital that they make the company work on both the top and bottom lines," he said. "Given the dynamics of the sector, this cannot be just a financial play. There needs to be a strategy to boost revenue and not just to cut costs."