Franchise Group says it would use Kohl’s real estate assets to fund the purchase of the business

A Kohl’s storefront with its new Sephora shop-in-shops. Credit: Kohl’s Corp.

If based in Menomonee Falls Kohls Corp. agree to be sold to Franchise Group Inc.Delaware, Ohio Franchise Group said it would finance the estimated $8 billion purchase of Kohl’s with $1 billion from increasing the size of its secured credit facilities and the remainder of the financing would be “provided on the real estate asset base of Kohl’s Corp. “, according to a press release from the company.

“Apart from increasing Franchise Group’s secured credit facilities, no financing of the transaction is expected to be recourse against Franchise Group,” the statement said.

Kohl’s and Franchise Group announced on Monday that they have reached an agreement three week exclusive trading period for a deal in which Franchise Group would acquire Kohl’s for $60 per share.

Kohl’s has 1,162 department stores in the United States and owns 400 of those properties, according to SEC filings. The company’s real estate assets are estimated to be worth between $7 billion and $8 billion.

Franchise Group owns and operates several franchise and “franchisable” businesses, including retail brands Pet Supplies Plus, American Freight, The Vitamin Shoppe, Badcock Home Furniture and more, and Buddy’s Home Furnishings. It also owns Sylvan Learning. Across its six-brand portfolio, Franchise Group has more than 3,000 locations, including 1,410 company-owned stores, 317 dealer-owned stores and 1,221 franchise stores, according to its 2021 10-K Annual Report.

For fiscal 2021, the company reported total revenue of $3.26 billion, up 60% from 2020. The company’s earnings for fiscal 2021 were $363.8 million, which is a huge jump from its 2020 earnings of $25.1 million according to the 10-K.

Franchise Group and Kohl’s noted that the three-week trading period does not guarantee a purchase agreement or transaction. The eventual sale would be subject to the approval of the boards of directors of both companies. Kohl’s said the purpose of the exclusivity period is to allow Franchise Group and its financial partners to finalize due diligence and financing agreements and for the two companies to complete negotiations around binding documentation.

Franchise Group is just one of many interested parties that have made offers to buy Kohl’s in recent months. Since January, the company – through Goldman Sachs – has engaged with around 25 bidders. Private equity investor Sycamore Partners also made an offer around the same time as Franchise Group, according to the the wall street journalfor mid-$50a share.

Following the announcement of exclusive negotiations with Franchise Group, Kohl’s stock price jumped from $42.14 on Monday’s close to $45.31 on Tuesday’s open. By early Tuesday afternoon, its shares were trading at around $45.50.

The department store chain’s board has come under increasing pressure to consider a full or partial sale of the business since earlier this year, when it takeover offers rejected of Acacia Research Corp. (a group backed by an activist investment company Starboard value) for $64 per share, or about $9 billion, and Sycamore Partners, for $65 per share. The move sparked a proxy battle with an activist investor Macellum Capital Managementwho ultimately lost the battle for control of the boardroom after shareholders voted for re-election the 13 outgoing Kohl directors on Macellum’s 10-candidate slate.

Soon after, two executives left Kohl’s: Greg Revelle, director of marketing, and Doug Howe, director of merchandising.

Throughout its vetting of potential suitors, Kohl’s board continued to emphasize that it “remains focused on selecting the path that maximizes value for all Kohl shareholders.”

The company noted in its recent first quarter earnings press release that “several bidders were invited to a data room containing more than 550,000 pages of over 55,000 documents, as well as meetings with management “.

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