Kohl’s rejection of two takeover bids and implementation of a poison pill last week appears just an opening round of a hostile battle for control of the business.
The Menomonee Falls, Wisc.-based value department store chain on Friday rejected a bid by Acacia Research Corp., which is controlled by activist hedge fund Starboard Value LP, to acquire 100 percent of the outstanding shares of Kohl’s for $64 a share in cash, valuing the company at $9 billion.
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It is also believed that Kohl’s rejected a $64 to $65 offer from Sycamore Partners, a private equity firm that has Belk, Loft, Express, Hot Topic, Ann Taylor and other retailers in its portfolio.
In response, Macellum Advisors, an activist investor pushing Kohl’s to explore strategic alternatives including selling the company and changes on the retailer’s board, said it “intends to do everything in our power to prevent the current board from continuing to chill a normal-course sales process” and that there’s a “growing crop of possible buyers of Kohl’s.”
“This is about posturing. The Kohl’s board believes it’s worth more,” said one financial source, reacting to the retailer’s rejection of the bids. “I’m expecting at least one of the bidders will raise the price. I don’t think this is the end of it by any means. Someone will go after the business more aggressively.”
The bidding on Kohl’s reflects growing interest in the retail sector — in particular what many see as the unrealized value of dot-com and retail real estate — as consumers return to stores in greater numbers with COVID-19 cases continuing to decline, and in the aftermath of strong 2021 performances.
“In several cases, the sum of the parts is better than the value of the whole,” one retail expert said.
Still headwinds for retailers are seen, due to inflation, supply chain bottlenecks and the anniversarying of last year’s government stimulus checks.
The interest in the industry has been spurred by Hudson’s Bay Co. breaking up its Saks Fifth Avenue, Saks Off 5th and Hudson’s Bay divisions into separate dot-com and brick-and-mortar store companies. That re-engineering “is clearly making sense at Saks, allowing them to invest in more inventory and technology. But I’m not sure it makes sense for other companies. It’s a case by case situation, depending on how the financials vary,” the financial source said.
Activist investors have been urging Kohl’s, as well as Macy’s Inc., to explore the possibility of separating their dot-com and brick-and-mortar store operations into separate companies. Kohl’s has already rejected the strategy, while Macy’s has hired advisers to explore it.
With Kohl’s, the takeover noise so far involves activist shareholders and private equity firms, rather than retailers. However, there has been speculation that Amazon could make a move on Kohl’s ever since the 2017 deal to open Amazon package return sites at Kohl’s locations. The theory is that acquiring Kohl’s would help bolster Amazon’s apparel business and enable Amazon to convert some Kohl’s stores to its own retail formats and warehouses to fulfill orders.
“We are disappointed and shocked by Kohl’s hasty rejection of confirmed indications of interest,” Jonathan Duskin, Macellum’s founder and managing partner, said in his statement Friday. The rejections, coming just two weeks after outreach from potential acquirers, “only validates for us that a majority of the board is entrenched and lacks objectivity when it comes to evaluating value-maximizing sale opportunities relative to management’s historically ineffective stand-alone plans. We doubt that interested parties were given adequate consideration or access to management, data rooms and the type of information required to inform upward adjustments to bids. Moreover, it appears that the board has not authorized its bankers to canvass the market and initiate substantive conversations with other logical suiters.
“We will do everything in our power to prevent the current board from continuing to chill a normal-course sales process,” Duskin added. “In our view, the board’s cumbersome Friday morning press release and adoption of a poison pill that has a lower trigger for investors that may seek more active engagement with the company demonstrate shareholders’ interests are not the top priority in the boardroom. It seems to us that the board is taking unprecedented steps to derail a credible process and kill interest among the growing crop of possible buyers of Kohl’s.”
Macellum plans to add a slate of candidates for the board who will be “open-minded when it comes to pursuing all paths to maximizing value.”
Macellum has been pressuring Kohl’s for some time. In April 2021, Kohl’s entered into an agreement with Macellum on board changes, giving the shareholder activist greater influence over the company. Two independent directors nominated by Macellum — Margaret Jenkins and Thomas Kingsbury — joined the board, and by mutual agreement, Christine Day also joined the board. Macellum has run successful board election contests at The Children’s Place, Citi Trends, Bed Bath & Beyond and Big Lots.
Not everybody thinks the criticisms of Kohl’s are fair, though its stock price declined dramatically last year.
“Some of the initiatives by the current management at Kohl’s I think have been great. Sephora was a great addition, and when Sephora was at Penney’s it clearly brought traffic in,” one retail expert said. “Some of the brands that are new to Kohl’s — among them Calvin Klein, Tommy Hilfiger, Lands’ End and Cole Haan — will also draw more traffic,” the expert added. “These are all very solid actions by Kohl’s.”
Kohl’s master plan, led by chief executive officer Michelle Gass, centers on establishing the retailer as a destination for casual and activewear, with the aforementioned brands as well as Nike, Under Armour, Adidas, Champion, Columbia and others. Kohl’s has also been revamping its women’s apparel business, and focusing on inclusiveness.
Kohl’s said its poison pill (officially called a shareholder rights plan) ensures that the board of directors can conduct “an orderly review of expressions of interest, including potential further engagement with interested parties. The rights plan does not preclude the board from considering an offer that recognizes the value of the company.”
The dividend distribution of one right for each outstanding share of the company’s common stock is payable to shareholders of record on Feb. 14. The rights are exercisable only if a person or group acquires beneficial ownership of 10 percent (or 20 percent in the case of passive institutional investors) or more of the company’s outstanding common stock. The plan provides the holders of the rights the ability to purchase more shares of the company at a 50 percent discount.
Kohl’s also said the rights plan provides several “shareholder-friendly” features, including an ability for shareholders to call a special meeting for purposes of exempting a “qualifying offer.”
“The poison pill does make it harder to take over the company. It becomes more expensive” for the pursuer, said the financial source. “But if someone comes back with a much more attractive price, that’s hard for the board to ignore. The poison pill is there just as a protection. It doesn’t say we are rejecting an offer at any price. It’s really one of the only things boards have at their disposal to block something. A poison pill is always on the back shelf. Every board has a poison pill ready to go, even if they don’t adopt it.”
In rejecting the bids, Kohl’s indicated that its board has determined, following a review with its independent financial advisers and upon the recommendation of its finance committee, that “the valuations indicated in the current expressions of interest, which it has received do not adequately reflect the company’s value in light of its 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 it believes would credibly lead to value consistent with its performance and future opportunities.”
Kohl’s said its board has designated its finance committee to lead “the ongoing review of any expressions of interest.” The finance committee, which was formed pursuant to the 2021 settlement agreement with Macellum Advisors GP LLC and other shareholders, is comprised exclusively of independent directors.
Kohl’s has also engaged Goldman Sachs and PJT Partners as financial advisers, and has asked Goldman to engage with interested parties.
“We have a high degree of confidence in Kohl’s transformational strategy, and we expect that its continued execution will result in significant value creation,” Kohl’s chairman Frank Sica said in a statement Friday. “The board is committed to acting in the best interest of shareholders and will continue to closely evaluate any opportunities to create value.”
Future bids could be affected by Kohl’s upcoming fourth quarter/year-end earnings report, and its investor conference in New York scheduled for March 7. “Sometimes you sit and wait and then come back with a counter offer,” the financial source said.
Last Tuesday, Cowen Equity Research issued a report raising some doubt on whether the bids that were on the table would trigger a deal, while indicating that “incoming investor feedback is split on whether a deal could be completed that is higher in price.”
Cowen also reported that a sale-leaseback of Kohl’s real estate, amounting to $2 billion to $3 billion, would be required to finance a deal, though the possibility of such a sale is uncertain.
“Our take is that based on Kohl’s trading price and various probabilities and prices, there could be a 20 to 30 percent chance, more or less, of a deal at $64 to $65 per share, and a 30 to 40 percent chance, more or less, of a deal getting done at $75 or higher,” Cowens indicated.
Kohl’s stock priced closed Friday on the NYSE at $59.68, up $1.10, or about 2 percent.