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Private Equity Shopping Spree
Private equity firms are flush with cash at the moment. Basically, this is the byproduct of an extended period of inactivity during the recession, coupled with new money rushing in to the field in the hopes of cashing in on the impending resurgence that most pundits are forecasting.
On the other side of the coin, the retail segment has been languishing for some time now. Sure, the holiday season comparisons have been getting better. And yes, seasonal sales increases have provided some glimmer of hope. Regardless, it is evident that consumer spending levels have not yet fully recovered.
The convergence of these two phenomena has brought these two very different entities together on the dance floor that is capitalism, and couples are pairing off at rates that would make a high-school prom chaperone blush.
Leonard Green & Partners has been the driving force behind much of the maneuvering. Over a number of weeks beginning in late 2010 and stretching into this year, Green went after, and successfully locked up agreements to purchase Gymboree, J. Crew Group, and Jo-Ann Stores. More recently, this private-equity concern has set its sights on larger prey, with advancements made toward BJ’s Wholesale Club (BJ). The two parties have entered into a confidentiality agreement related to a potential buyout. This motion is just preliminary and does not necessarily mean that a purchase will occur. In fact, in this particular case, Green has a sizable position in BJ’s already, and some are speculating that this posturing could just be to draw additional offers from third parties. On the same side of that coin, BJ’s management had kindly declined initial forays in its direction, but was quick to point out that it was worth much more than the figures that were being floated. Based on current market valuations, we think BJ’s should fetch between $60 and $80 a share. Even when using the low end of this range, that still represents a premium greater than 20% of where these shares were recently trading.
We anticipate something getting done on this front sooner rather than later, and we still believe that, in all likelihood, Green will be the buyer. There is a dearth of strategic suitors in the current landscape. Target (TGT) has been thrown out there, and we see the reasoning, but is a direct advance at Wal-Mart (WMT)’s market share really a wise decision? If things were to unravel, Big Lots (BIG) has already been anointed a likely target by a bevy of investment Web sites. The eagerness of this company’s management to sell has been cited as one of its most appealing characteristics.
Another interesting tryst involves a play on the lower-income consumer. Many shoppers are responding to their personal budgetary crunches by downgrading the types of stores they frequent, from boutiques to discounters and now to even thriftier chains. Nelson Peltz’s Trian Group has made an offer to take out Family Dollar Stores (FDO). Trian already had a stake in FDO before making the bid, which was for between $55 and $60 a share. Family Dollar was not quick to jump into Trian’s arms, and again the general belief is that the company is fishing for a greater price. Dollar General (DG), which was previously purchased by private-equity titan Kohlberg Kravis & Roberts and then returned to a publicly traded company in November of 2009, has entered the mix here as well, but that company is playing its cards close to the vest early on. While these firms continue to waltz, Leonard Green & Partners teamed up with the family that owns a majority stake in 99 Cents Only Stores (NDN). That company’s share price quickly rose past the proposed offer amount. This tells us that the market is getting hip to such strategies of throwing out a proposed number, letting it sink in, having management think it is too low, raise the offer, then close the deal. Green has used such chicanery in the aforementioned deals and the NDN proceedings appear to be more of the same. Even so, we expect this pact will indeed be worked out over time.
Lastly, the teen and young adult clothing arena also looks like a superb market to capitalize on. Not surprisingly, the sharks are already circling in these waters. Abercrombie & Fitch (ANF) has long been speculated as a desirable target, and the $75 a share figure being tossed around among some private-equity concerns would represent a roughly 25% premium for current shareholders. ANF has name recognition and strong customer retention rates among desirable demographics in the shopping world. Still, an even larger premium spread is resonating among one of its peers.
While many industry gurus drool about the potential of an Abercrombie pact, American Eagle Outfitters (AEO) is sitting in aisle two. American Eagle took much longer to sell its merchandise last year than anyone on the Street could have expected. Over exuberant inventory levels were likely the culprit, but the shares have been maligned nonetheless. Still, the company has zero debt and its CEO is set to exit in the near term. A few new brands and added international expansion might be just what the doctor ordered to get results on the incline again. Such plans would be hastened by a leveraged buyout. The company’s statistics on a fundamental basis versus many of its peers appear to be a private-equity dream. A relative warchest of cash leads the way on a strong balance sheet, and substantial cost cutting has recently occurred. Using recent deals as a gauge, American Eagle receiving as much as $24 a share in a takeout is within the realm of possibility. If so, a 50% premium from the shares’ recent value would be attained.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.