Kohl’s refuses to take over bids, protest expected – WWD

Kohl’s rejection of two bids and execution of a poison pill last week was just the opening round of a hostile battle for control of the business.

The Wisc-based Menomonee Falls-based value department store chain on Friday rejected an offer by Acacia Research Corp., controlled by hedge fund Starboard Value LP, to buy 100 percent of its stock. Kohl’s outstanding at $64 a share in cash, valuing the company at $9 billion.

Kohl’s is also believed to have turned down an offer of $64 to $65 from Sycamore Partners, a private equity firm that has Belk, Loft, Express, Hot Topic, Ann Taylor and other retailers in its portfolio. its investment.

In response, Macellum Advisors, an activist investor pushing Kohl’s to explore strategic alternatives including a sale of the company and changes to the retailer’s board of directors, said it “plans to do so.” everything in its power to prevent the current board from continuing to lower the normal selling price. process” and that there is a “growing crop of Kohl’s buyers. ”

“This is about posture. Kohl’s board believes it’s worth more,” said one financial source, reacting to the retailer’s bid rejection. “I am expecting at least one of the bidders to raise the price. I don’t think this is the end of it in any way. There will be people pursuing the business more aggressively.”

The bidding on Kohl’s reflects growing interest in the retail sector – particularly in what many see as the unrealized value of dot-com and retail real estate – as consumers Consumers returned to stores in greater numbers with COVID-19 numbers continuing to decline, and the aftermath of a strong 2021 performance.

“In some cases, the sum of the parts is better than the value of the whole,” said one retail expert.

Difficulties remain for retailers, given inflation, supply chain bottlenecks and the anniversary of last year’s government stimulus checks.

Interest in the industry has been spurred by Hudson’s Bay Co. split the Saks Fifth Avenue, Saks Off 5th and Hudson’s Bay divisions into separate dot-com companies and brick-and-mortar stores. The redesign “clearly makes sense at Saks, allowing them to invest in more inventory and technology. But I’m not sure it makes sense for other companies. That’s case by case, depending on how different the financing is,” the financial source said.

Activist investors have urged Kohl’s, as well as Macy’s Inc., to explore the possibility of splitting their dot-com and brick-and-mortar operations into separate companies. Kohl’s rejected this strategy, while Macy’s hired consultants to explore it.

For Kohl’s, the takeover has so far involved activist shareholders and private equity firms, rather than retailers. However, there has been speculation that Amazon might follow through on Kohl’s move since the 2017 deal to open Amazon package return sites at Kohl’s locations. The theory is that the Kohl’s acquisition will help boost Amazon’s apparel business and allow Amazon to convert some of Kohl’s stores into its own retail and warehouse formats to fulfill orders. order.

Jonathan Duskin, founder and managing partner of Macellum, said in Friday’s statement: “We are disappointed and shocked by Kohl’s hasty rejection of confirmed signs of interest. The rejections, which came just two weeks after being approached from potential acquirers, “only testify to us that much of the board has been entrenched and lacks objectivity when it comes to evaluating sales opportunities.” value-maximizing customer compared to management’s previous ineffective stand-alone plans. We suspect that interested parties have had adequate review or access to management, the data department, and the type of information needed to inform bid adjustments. Furthermore, it appears that the board has not allowed its bankers to enter the market and initiate substantive conversations with other reasonable pursuers.

“We will do everything in our power to prevent the current board from continuing to derail the normal sales process,” Duskin added. “In our view, Friday morning’s cumbersome press release by the board and the passage of a poison pill have less of an effect on investors who might be looking for active engagement. Being more positive with the company proves that shareholders’ interests are not the top priority in the boardroom. To us, it seems like the board is taking unprecedented steps to derail a trusted process and kill the interest of burgeoning Kohl’s buyers. “

Macellum plans to add a group of candidates to the board who will be “open to pursuing all avenues to maximize value”.

Macellum has been pressuring Kohl’s for a while. In April 2021, Kohl’s signed an agreement with Macellum for changes to the ship, gives shareholder activists greater influence over the company. Two independent directors nominated by Macellum – Margaret Jenkins and Thomas Kingsbury – have joined the board of directors and by mutual agreement, Christine Day also joins the board of directors. Macellum has successfully held board contests at The Children’s Place, Citi Trends, Bed Bath & Beyond and Big Lots.

Not everyone thinks the criticisms of Kohl’s are fair, despite the company’s stock price plummeting last year.

“I think some of the initiatives by the current management at Kohl’s are great. Sephora is a great addition, and when Sephora was at Penney’s it clearly brought in traffic,” said one retail expert. “Some of Kohl’s new brands – among them Calvin Klein, Tommy Hilfiger, Lands’ End and Cole Haan – will also attract more traffic,” the expert added. “These are all very solid actions by Kohl’s.”

Michelle Gass

Michelle Gass inside Kohl’s.
Courtesy of Kohl’s

Kohl’s master plan, led by chief executive Michelle Gass, focuses on establishing the retailer as a destination for casual and activewear, with the aforementioned brands as well as Nike, Under Armor, Adidas, Champion, Columbia and other brands. Kohl’s is also reinventing the women’s apparel business with a focus on inclusivity.

Kohl’s said its poison pill (formally known as a shareholder rights plan) ensures that management can conduct “an orderly review of expressions of interest, including the possibility of participation. deeper with interested parties. The rights plan does not prevent the board of directors from considering an offer that recognizes the value of the company. ”

The distribution of a one-right per share outstanding dividend of the company’s common stock to be paid to the shareholders is recognized on February 14. The right is exercised only if a person or group has obtain beneficial ownership of 10 percent (or 20 percent in the case of passive institutional investors) or more of the company’s common stock outstanding. This plan gives rights holders the ability to purchase additional shares of the company at a 50% discount.

Kohl’s also said the rights plan offers a number of “shareholder-friendly” features, including the ability for shareholders to call a special meeting for the purpose of waiving a “qualified offer.”

“The poison makes takingovers more difficult. It becomes more expensive” for the pursuer, the financial source said. “But if someone comes back at a much more attractive price point, the board is hard to ignore. The poison pill is there only as a protective measure. It doesn’t say we’re turning down an offer of any kind. It’s really one of the only things that boards have permission to use to block something. A poison pill is always on the back shelf. Every council has a poison pill available, even if they don’t accept it.”

In rejecting the bids, Kohl’s indicated that its board had determined, after consideration with its independent financial advisors and on the recommendation of the finance committee, that “the The valuation indicated in the current expression of interest, which it has received, does not fully reflect the value of the company based on future growth and cash flow generation.”

Kohl’s also said the board is “committed to maximizing the long-term value of the company and will review and pursue opportunities that the company believes will lead to value consistent with its operating performance and strategic goals.” future opportunities.”

Kohl’s said its board has appointed its finance committee to lead “the ongoing review of any expression of interest.” The finance committee, established under a 2021 settlement agreement with Macellum Advisors GP LLC and other shareholders, is composed of independent directors only.

Kohl’s also invited Goldman Sachs and PJT Partners as financial advisors, and asked Goldman to engage with interested parties.

“We strongly believe in Kohl’s transformation strategy, and we expect that continued execution will lead to significant value creation,” said Frank Sica, Kohl’s president, in a statement. announced on Friday. “The Board of Directors is committed to acting in the best interests of shareholders and will continue to closely evaluate any opportunity to create value.”

Future bids could be impacted by Kohl’s upcoming year-end/quarter-quarter earnings report and its investor conference in New York scheduled for March 7. “Sometimes you sit down. and wait and then come back with a counter offer,” the source said.

Last Tuesday, Cowen Equity Research released a report that raised some doubts about whether bids across the board triggered a trade, noting that “investor feedback upcoming investment is shared about whether a transaction can be completed at a higher price.”

Cowen also reported that a sale and leaseback of Kohl’s real estate, valued between $2 billion and $3 billion, would be required to finance a deal, although the likelihood of such a sale is unlikely. sure.

“Our view is that based on Kohl’s trade price and various probabilities and prices, there could be a 20 to 30% chance, less or less, a trade being made at $75. la or higher,” Cowens pointed out.

Kohl’s stock closed Friday on the NYSE at $59.68, up dollars1.10, or about 2 percent. Kohl’s refuses to take over bids, protest expected – WWD


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