After weeks of speculation about its future as it fended off an activist investor Macellum Advisors through a proxy fight, Kohl’s Corp. has announced that, following the receipt of final proposals, its board of directors had entered into exclusive negotiations with Franchise Group, a holding company operating multiple retail brands, for a period of three weeks in relation to that company’s proposal to acquire Kohl’s for $60 per share.
In an announcement of its own, Franchise Group reported that it intends to contribute approximately $1 billion of capital to the Kohl’s transaction, all of which is expected to be funded through an increase in its secured debt facilities. The company anticipates that it would base the majority of the transaction financing on the real estate assets of Kohl’s Corp. Other than the increased secured debt facilities, Franchise Group asserted that none of the financing for the transaction would recourse to it.
Franchise Group characterizes itself as a world-class franchising platform for an increasingly diverse collection of market-leading and emerging brands offering exceptional service-based or retail experiences. With an eye toward franchisees and customers, Franchise Group stated that it partners with strong management teams and franchisees collaboratively to identify resources that can drive operational and strategic improvements that support sustainable long-term profitability.
Franchise Group roots go back to a 2019 transaction announced by Liberty Tax, Inc. the parent company of Liberty Tax Service. Then, the company announced that it had entered into definitive documentation with affiliates of Vintage Capital Management for a series of strategic transactions, including the acquisition of all of the outstanding equity interests in Buddy’s Newco, LLC, which operated Buddy’s Home Furnishings business. Liberty maintained that the transactions were a first step in a planned strategic transformation that would shift its focus on the acquisition of or investment in other franchise-oriented or complementary businesses, including businesses not subject to franchising arrangements but that have the potential to be franchised in the future. At the same time, Liberty stated an intention to change its name to Franchise Group and remain a publicly-traded company.
In October 2019, Franchise Group, as documented on its website, acquired SearsOutlet for $130 million and, in December, The Vitamin Shoppe for $208 million. In February 2020, Franchise Group acquired American Freight for $450 million with the intention of combining it with SearsOutlet, so establishing a national value retailer while realizing $42 million in synergies. In December 2020, the company acquired FFO Home in a Chapter 11 bankruptcy transaction and converted its locations to American Freight Furniture and Mattress. In 2021, Franchise Group acquired Pet Supply Plus for $700 million, Sylvan Learning for $81 million and W.S. Badcock Corp. for $580 million. In the meantime, it sold Liberty Tax for $245 million.
Retail research specialist Pulse Ratings noted that the exclusivity period Kohl’s announced is an indication that its board of directors is ready to move forward with a sale if Franchise Group can coordinate the necessary financing. The published purchase price would represent about a 42% premium over the current share price, which, Pulse Ratings observed, would be difficult to turn down as it doesn’t believe the retailer has demonstrated the ability to organically grow its share price to that level in the near term. A completed transaction would transform Franchise Group as it would grow revenue to $23-plus billion representing a 450% growth from its existing $4.3 billion in the last 12-month revenue. The transaction would add roughly $8 billion in debt to the combined business’s balance sheet and grow net debt to EBITDA. Pulse Ratings expects that Franchise Group to enter into a sale/leaseback transaction after an acquisition even if it adds rent expense and depletes Kohl’s asset base. It also could sell additional equity to help finance the transaction.