Kohl’s and Franchise Group are in a three-week exclusive negotiation for Franchise Group to acquire the department store for $60 per share in cash, a transaction subject to the approvals of both boards, the companies said Monday. The talks follow Kohl’s receipt of final bids, according to a Kohl’s press release.
Franchise Group, whose holdings include Pet Supplies Plus, American Freight, The Vitamin Shoppe, Badcock Home Furniture & More, Buddy’s Home Furnishings and Sylvan Learning, intends to contribute about $1 billion to the transaction, funded through an increase in its secured debt facilities, per its press release.
The purchase price equates to some $9 billion, per analysts. Most of that will leverage Kohl's real estate assets, Franchise Group said. Aside from the $1 billion increase in its secured debt, Franchise Group said it won't be liable for any of that financing.
Kohl's began 2022 with activist investors on its case, and a sale has grown more likely with each passing month. Rumored suitors have included private equity firm Sycamore Partners, Canadian department store company Hudson's Bay Co. and Amazon.
Franchise Group is the last one standing, at least for now. Finalizing the deal would take a lot of debt, though B. Riley analysts led by Susan Anderson said in a client note that between the value of Kohl's real estate and its record of strong cash generation, it could be quickly paid down.
Still, the load will hamper Kohl's as it tries to soldier on with its turnaround, GlobalData Managing Director Neil Saunders said in emailed comments, calling the debt level the "biggest downside" of the deal.
And not the only one, according to GlobalData. Franchise Group calls itself "an owner and operator of franchised and franchisable businesses," but franchising a department store would be a difficult undertaking, Saunders said. Furthermore, Franchise Group owns a lot of retail brands, but none as large as Kohl's. Without additional skills, the company wouldn't contribute much to Kohl's beyond the added debt.
"There is a lot of work to be done to put Kohl’s on the right track and we are not entirely convinced that Franchise Group has the expertise to make all the required changes," Saunders said. "Kohl’s management likely knows all of this. However, it is currently holding a very weak hand which makes it more difficult, although not impossible, to reject the offer."