Kohl’s offer is not as aggressive as it looks. More will happen before it’s over.
A group led by Starboard Value LP has reportedly made a bid to buy Kohl’s department store for around $9.3 billion. The group says it has a “very confident” letter from a bank that money will be available to complete the transaction. This is by no means a guarantee, but if the bank is credible (the name of the bank has not been made public), there is a good chance that the deal can be done.
What is the actual price?
If the Starboard Group buys Kohl’s, it will not only pay for the shares, it will also have to assume Kohl’s debt. As of its last financial statement (October 2021), Kohl’s debt was $6.5 billion, which would bring the company’s total value to nearly $16 billion. However, of the $6.5 billion in long-term debt, $4.6 million is capital lease obligations, the present value of leases, presumably mostly for stores, that Kohl’s is obligated to pay in rent. future. Excluding future lease obligations, Kohl’s has less than $2 billion in debt. Using this figure, the total value offered is approximately $11.2 billion.
What is the real value?
Kohl’s 2022 EBITDA estimate (earnings before interest, taxes, depreciation and amortization, the number that shows the company’s earnings, regardless of how it is financed), is over $2.5 billion. , versus $2.4 billion in the last twelve months ending October 2021 Using the $11.2 billion figure and excluding capitalized leases (but including rent), the multiple paid for revenue of Kohl is less than five times. Here are some comparable multiples using trailing 12-month EBITDA multiples:
Ross Stores 14.4x
Burlington Stores 14.1x
4.2x from Dillard
With the industry selling multiples higher than the current supply and Kohl’s revenue on the path to improvement, you can see how a buyer with some confidence in Kohl’s ability to improve sales and revenue can see it as a good deal that he can publicize. the future at a much higher value.
Additionally, numerous reports indicate that Kohl’s has billions in unrealized real estate value. If the Starboard Group takes control of the company and sells assets by the billions to pay off the debt it incurred in the transaction, the cost becomes even cheaper. Real estate can also be used in financing; if Starboard leverages real estate instead of borrowing money on an unsecured basis, it will significantly reduce its cost (from a range of about 10% to about 4% in today’s market).
This story is not over
Kohl’s attractive price relative to its revenue is why it attracts a bid. If Kohl’s board says it’s considering a bid, it’s easy to imagine how another bidder, especially one with retail experience, could emerge to buy Kohl’s. It can also cause the board to satisfy shareholders by taking on more debt and paying a large dividend to shareholders to avoid losing control of the company.
The big long-term strategic question that attracts investors to want to buy Kohl’s, or repels them, is the question of the future of Kohl’s business model. Will retailers with large department store install bases be the future of retail? Will they be able to adapt to the way consumers want to shop today? If you believe that department stores are part of the future landscape and that department stores will be able to include the technology and services they need to be competitive, then this is an attractive offer for an acquirer.
We don’t know for sure if Starboard can raise the capital; funding markets can change quickly as the economy experiences much higher inflation and the Fed responds. We don’t know if other buyers will emerge. But it seems likely that Starboard’s offer won’t just be accepted and the deal done, there are too many other possible outcomes for this to just end, this story has more chapters to write before it isn’t over.
Kohl’s low price relative to competitors and the potential for asset sales is what is driving interest. Buyers who are bullish on retail stores will see Kohl’s as an attractive opportunity at the price. If the board allows this offer to go ahead, others will see a good deal and get involved.