The Offer For Kohl’s Is Not As Aggressive As It Sounds. More Will Happen Before It’s Over.

A group led by Starboard Value LP has reportedly made an offer to buy department store Kohl’s for about $9.3 billion. The group says it has a “highly-confident” letter from a bank indicating that the money will be available to complete the transaction. That’s not a guarantee by any stretch but if the bank is credible (the name of the bank has not been publicly released) then the chances are high that the deal can be completed.

What’s The Real Price?

If the Starboard group buys Kohl’s, they’ll pay not just for the stock, they’ll also have to assume the debt of Kohl’s. As of its last financial statement (October 2021), Kohl’s debt was reported to be $6.5 billion which would make the total value of the company close to $16 billion. However, of the $6.5 billion of long-term debt, $4.6 million is capital lease obligations, the current value of leases, presumably mostly for stores, that Kohl’s is obliged to pay in future rent. If you exclude the future rent obligations, Kohl’s has debt of under $2 billion. Using that number, the total value being offered is about $11.2 billion.

What’s The Real Value?

The estimate for Kohl’s 2022 EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, the number that shows the earnings from the business regardless of how its financed), is over $2.5 billion, up from $2.4 billion in the last twelve months ending October 2021. Using the $11.2 billion figure and excluding the capitalized leases (but including rent), the multiple being paid for Kohl’s earnings is under five times. Here are some comparable multiples using last twelve months EBITDA multiples:

Walmart 12.4x

Target 10.6x

TJX 18.5x

Ross Stores 14.4x

Burlington Stores 14.1x

Macy’s 6.0x

Gap 9.5x

Dillard’s 4.2x

Nordstrom 7.3x

With the industry selling for multiples higher than the current offer and Kohl’s earnings on an improving track, you can how a buyer with some faith in the ability of Kohl’s to improve sales and earnings can see this as a good deal that they can take public in the future at a much higher value.

Other Assets

In addition, there are numerous reports that Kohl’s has billions in unrealized real estate value. If the Starboard group gets control of the company and sells off assets in the billions to pay down debt it assumed in the transaction, the cost becomes even cheaper. The real estate is also usable in the financing; if Starboard leverages the real estate instead of borrowing the money on an unsecured basis, it will lower its cost substantially (from a range of about 10% to about 4% in the current market).

This Story Isn’t Done

The attractive price of Kohl’s relative to its earnings explains why it’s attracting an offer. If the Kohl’s board says it consider an offer, then it’s easy to imagine how another bidder, especially if they have retail experience, could emerge to buy Kohl’s. It may also cause the board to satisfy shareholders by taking on more debt and paying a big dividend to shareholders in order to avoid losing control of the business.

The big, long-term strategic question that attracts investors to want to buy Kohl’s, or repulses them, is the question of the future of Kohl’s business model. Will retailers with big installed bases of large stores be the future of retail? Will they be able to adapt to how consumers want to shop now? If you’re a believer that big stores are part of the future landscape and big stores will be able to include the technology and services they need to compete effectively, then this is an attractive deal to an acquirer.

We don’t know for sure if Starboard can raise the capital; financing markets can change rapidly 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 the offer from Starboard won’t be simply accepted and the deal closed, there are too many other possible outcomes for this to end that simply, this story has more chapters to be written before it’s done.

The low price of Kohl’s relative to its competitors and the potential for the selloff of assets is what’s 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 bid to move forward, other will see a bargain and get involved.