American department store retail chain Kohl's has entered into exclusive negotiations with Franchise Group for a possible acquisition. The retail holding company is reportedly offering to buy out the company for $60 per share, an offer that values Kohl's at around $8 billion.
Franchise Group's offer represents a roughly 42% premium over Kohl's share price, which closed at $42.12 per share on Monday. Kohl's has a market capitalization of around $5.4 billion. Kohl's shares hit a 52-week high of $64.38 in late January.
Sources with knowledge of the matter said that Franchise Group is working with Oak Street Real Estate to finance the planned transaction. Kohl's said that the acquisition is still subject to approval by its board of directors and Franchise Group's directors. The company said that there was no assurance that an agreement would be reached.
Franchise Group, which owns the Vitamin Shoppe and Buddy's Home Furnishings, among other businesses, said its finance partners would have three weeks to conclude due diligence and financing arrangements, as well as to negotiate binding agreements. Franchise Group said it would not comment any further until an agreement from both sides is reached or until negotiations are concluded.
Kohl's has been embroiled in an internal conflict for more than six months. In December, Engine Capital, a New York-based hedge fund, initially demanded that the off-mall department store consider a sale or another option to increase its stock price. Kohl's stock was trading at roughly $48.45 at the time.
Macellum Advisors, an activist hedge fund, again pressed for Kohl's to consider a sale in mid-January. Jonathan Duskin, Macellum's CEO, said executives were materially mismanaging the company. He also stated that Kohl's real estate still had lots of promise.
Earlier in the month, Kohl's reported sales of $3.72 billion for the three months ended April 30, down from $3.89 billion over the same period last year. The company cut its profit and sales expectations for the whole fiscal year, angering investors and casting doubt on a potential merger.
Confidence in a deal pushing through has also been dampened by rising interest rates and market volatility. Overall merger activity has also dramatically slowed down in recent months. Deals in the famously volatile retail business can be especially difficult to finance since lenders must be confident in future cash flows.
Kohl's had been having financial difficulties even before the pandemic. Its operating margin shrank to 6.1% in 2019 from 11.5% in 2011, despite flat revenues. Then came the coronavirus pandemic, which decimated sales and wiped off the company's revenues in 2020.
Other sources claimed that Kohl's may have received another bid from private-equity firm Sycamore Partners. The bid is reportedly in the mid-$50 range, which is much lower than Franchise Group's offer.