Why Franchise Group wants to buy Kohl’s and what could happen next
Peoria shoppers enter the Kohl’s shop in Illinois.
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An obscure conglomerate that includes the Vitamin Shoppe and Pet Supplies Plus, as well as a chain of home furnishings called Buddy’s, is now the talk in the retail sector.
Franchise GroupA publicly traded company with an estimated market capitalization in excess of $1.6 billion has reached exclusive sales negotiations with Kohl’s. It proposed a bid of $60 per share to acquire the retailer at a roughly $8 billion valuation. Franchise Group and Kohl’s have a 3-week window in which they can complete due diligence and make final financing arrangements.
Since then, questions have been raised about the implications of this deal for Kohl’s. What happens to Sephora’s beauty shops-in-shops inside Kohl’s? Or the retailer’s return partnership with Kohl’s Amazon? Michelle Gass (Kohl’s CEO) will she continue with the company? Do store closures seem inevitable?
Franchise Group also wonders why Kohl’s would want to be owned in the first instance. retailers including Kohl’s confront inventory challenges and inflation? Kohl’s has slashed its full year financial outlook as Americans cut back on discretionary spending. This was just a few weeks prior. Investors continue to fight rate hikes by the Federal Reserve as well the risk of recession.
These questions are still being negotiated and the deal is in flux. Experts and analysts instead look at Franchise Group’s history and the recent acquisitions it made to gain a better understanding of Kohl’s potential future.
Representatives from Sephora, Amazon and Franchise Group didn’t respond immediately to inquiries for comment. Kohl’s did not comment.
Michael Baker is a senior analyst for D.A. Davidson.
Then they will have an entirely different strategy about how to capitalise or how to monetize their acquisitions, he said. Sometimes it is turning company-owned shops into franchises.
According to their website, Franchise Group was formed in 2019 by a $138m merger of Liberty Tax and Buddy’s.
Franchise Group was founded by Brian Kahn (President and CEO), who is also a former executive in private equity. The company acquired Sears’ Outlet Business; Vitamin Shoppe and American Freight. American Freight sells furniture, mattresses, appliances and Pet Supplies Plus. Sylvan Learning and Badcock are home furnishings chains that target lower income households.
New York’s Vitamin Shoppe.
Scott Mlyn | CNBC
Franchise Group is primarily in the franchise business. However, it is likely that Kahn will not use the same strategy for Kohl’s which boasts more than 1,100 brick-and mortar stores in 49 US states.
“The best strategy would be to collaborate with the existing management team in order to make it run. [Kohl’s]Baker said that they would do a better job or replace their management team if required. They’ve already done this with some assets. Kahn’s track record is one of good deals.”
Baker was able to use Badcock from Franchise Group, the most recent acquisition. a deal valued at about $580 millionAs an example, take the following: To bring in $265million, the company entered into two separate sales agreements. One for Badcock’s retail outlets and one for Badcock Distribution Centers, Corporate Headquarters, and Additional Real Estate. Rob Burnette continues to serve as Badcock President and CEO.
On an earnings call in early May, Franchise Group’s Kahn told analysts — without naming Kohl’s directly — what he looks for in any transaction.
He stated, “Management is for us always the key.” “Whether it’s very little transactions or large ones, we all do them.”
Kahn said that he has a lot confidence in the brands he operates now.
He added that all of Franchise Group’s past acquisitions generate plenty of cash to support the company’s dividend and to allow for further M&A activity, and any deals it considers in the future would also have to fit this mold.
Kohl’s was founded earlier this year. deemed a per-share offer of $64 from Starboard-backed Acacia Research to be too low. The stock of the retailer was trading as low as $34.64 in May and has not been higher than $64.38 since January. Kohl’s stock closed Wednesday night at $45.76.
Franchise Group may consider the offer of $60 per share to be a bargain, especially since the company is able to finance most of its transaction using real estate.
Franchise Group said in a press release earlier this week that it plans to contribute about $1 billion of capital to the Kohl’s transaction, all of which is expected to be funded through debt rather than equity. According to someone familiar with the situation, Apollo has been selected to provide term loans to Franchise Group. CNBC reached Apollo’s spokesperson but he didn’t respond immediately.
In the meantime, most of this deal can be financed via real estate. CNBC previously reported that Franchise Group is working with Oak Street Real Estate Capital on a so-called sale-leaseback transaction. Oak Street refused to comment.
Franchise Group will receive capital from Oak Street if it proceeds in this manner. It would also no longer own Kohl’s real property on its balance sheets. It would instead have to pay rent and fulfill lease obligations.
Kohl’s was the owner of 410 shops, had 517 leases and operated 238 ground leases at its stores as of January 29. According to an annual filing, all of the company’s real estate was worth just over $8 billion.
Franchise Group will only pay $1 billion to acquire the real property if it can earn $7 billion, $8 billion. It’s a very affordable investment,” Susan Anderson, senior analyst at B. Riley Securities said. “And I believe [Kahn]He wouldn’t agree to the deal until he has already made the sale and all the agreements in place.”
However, some experts in retail are skeptics of the idea. They believe that a large real estate sale would put Kohl’s in a weaker financial situation.
GlobalData Retail’s managing director Neil Saunders said, “This is entirely unnecessary. It will only serve as a weakening of the firm and reduce investments that are required to revitalize it.” The model of taking over other retail companies has not worked out well.
It is true that some sales-leaseback transactions, particularly on a smaller scale, were successful.
Big Lots made a deal in 2020 with Oak Street raise $725 millionFrom selling four distribution centers owned by the company and renting them back. This provided liquidity for the retailer in big boxes during the Covid-19 pandemic.
Additionally, in 2020 Bed Bath & BeyondCompleted a sale-leaseback transactionOak Street sold approximately 2.1 Million square feet of commercial property and made $250 million in profits. Mark Tritton of Bed Bath described the acquisition at the time to be a way to raise capital and invest in the business.
According to Vincent Caintic (an analyst at Stephens), Franchise Group might be looking to Kohl’s to increase efficiency on its backend. He suggested that combining resources like fulfilment centers or shipping companies could prove to be smart.
Caintic explained that the stores include furniture, rent-to-own, and many of them handle consumer goods. Perhaps they could get additional pricing power if they become a bigger company.
He said that Franchise Group would make the largest acquisition of franchises to date. However, it could also mean that there will be a steeper learning curve.
The total revenue of all Franchise Group retailers was $3.3B in 2021. Kohl’s 12 month-end sales total surpassed $19.4Billion.
Caintic explained that Franchise Group’s history includes buying businesses, leveraging them up and then quickly releasing capital to repay the debt. They have a plan.”
But, he added, the companies Franchise bought before it pursued Kohl’s were much smaller – “And those were done when it was very cheap to get debt.”