Kohl’s lands $9 billion bid backed by activist investor

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Department store Kohl’s has received an offer of around $9 billion to go private in a deal with an investment consortium backed by activist hedge fund Starboard Value, according to two people familiar with the matter.

The offering highlights renewed interest in department stores from activist investors as brick-and-mortar retailers grapple with supply chain issues amid the pandemic and increasing competition from online sites. Retailer stocks have been under pressure in recent years, while online site stocks have soared until recently.

Kohl’s is already under pressure to improve its share price. Activist firm Macellum Advisors, which owns 5 percent of Kohl’s, wrote in a letter last Tuesday urging the retailer to explore strategic alternatives, including a sale. That was after it offered similar criticism of Kohl’s stock performance last year.

The speedy processing of Macellum’s letter and the consortium’s bid could be the start of a dance to pressure the Kohls to consider a sale — or otherwise quickly boost the stock price. In response to Macellum’s letter, Kohl’s said last week that it has confidence in its board and will “aggressively pursue the best interests of all shareholders.”

Based in Menomonee Falls, Wisconsin and founded in 1962, Kohl’s is a department store specializing in casual clothing, home goods and sporting goods. Unlike other retailers like Nordstrom, Kohl’s stores are often found in smaller malls rather than malls. That has made its real estate more valuable as malls have fallen on hard times.

A key question will be whether the Starboard consortium will raise the necessary funds to fund the offering, especially given the challenges posed by previous leveraged buyouts of retailers such as Toys “R” Us, Payless and Neiman Marcus. Those deals left retailers saddled with debt and unable to make the necessary investments as e-commerce transformed the retail landscape. All three eventually could no longer make their loan payments and filed for bankruptcy. Both Neiman Marcus and Payless emerged from bankruptcy, while Toys “R” Us eventually went into liquidation.

Kohl’s shares are up less than 4 percent over the past year, giving the company a market cap of about $6.5 billion. The offer, first reported by the Wall Street Journal, would value the retailer at $64 per share, a 37 percent premium to Friday’s closing price of $46.84.

Acacia Research Corporation, which is leading the offering, has been supported by Starboard since 2019. Starboard has helped Acacia raise a “significant” amount of equity to fund its offering, said one of those familiar with the discussions. Acacia has also received a letter of confidence from a bank, that person said, saying the bank believes it can help assemble some of the debt needed for the transaction. Acacia is also in talks with a real estate company that would sell a portion of Kohl’s property to fund the offering, the person said.

Both people who spoke about the matter requested anonymity as the offer is confidential. A Kohl’s spokeswoman did not immediately respond to a request for comment.

Even with uncertain funding, the offer could put pressure on the Kohls, as Macellum has threatened to nominate directors to Kohl’s board “if the status quo holds.” In his letter, Macellum criticized Kohl’s for “poorly managing the business and failing to implement necessary operational, financial and strategic improvements.” It’s putting pressure on Kohl’s to consider spinning off its e-commerce business.

Macellum reached an agreement with the retailer last April that included the addition of three new directors to the board. Kohl’s shares have since fallen more than 20 percent as supply chain challenges have rattled the industry.

“We have continued to work with Macellum since the settlement and are disappointed with the path they have taken and the unfounded speculation in their announcement and letter,” Kohl’s said in response to Macellum.

Kohl’s has argued that its efforts to invest in its online and sportswear businesses are underway — and gaining momentum. In November, it reported that its third-quarter sales were up 16 percent. In December 2020, the company announced a partnership with Sephora to attract more shoppers to its stores. Its activewear business, designed to make all sizes more inclusive, now accounts for just over a quarter of its sales.

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