The recent move by
Kohl's Corp. to reject a $9 billion takeover bid is considered a plot twist in the ongoing saga of the retailer's turnaround efforts.
"I didn’t think it would go down this way," said David Swartz, equity analyst at Morningstar Research Services LLC, in an email. "Now, Kohl’s faces another proxy battle, and I think it will be uglier than last year."
On Friday, Kohl's announced it turned down
unsolicited offers received reportedly from two private equity investors:
Acacia Research Corp. (a group backed by activist investor firm
Starboard Value) for $64 a share or about $9 billon, and
Sycamore Partners, for $65 a share. The company determined the offers were too low but said it would "review and pursue" other opportunities. It also doubled down on its current long-term growth strategy and promise of "significant value creation."
Kohl's turnaround plan was the subject of a
BizTimes cover story last year.
Kohl's decision drew criticism from New York hedge fund and activist investor
Macellum Capital Management, which owns a 5% stake in Kohl’s and has
urged the company to evaluate a full sale through an open review process. Macellum managing partner Jonathan Duskin issued a statement Friday, saying the firm is “disappointed and shocked by Kohl’s hasty rejection” and will soon nominate a slate of independent board candidates for election at the 2022 annual meeting.
Macellum was part of the activist investor group that attempted to take control of Kohl's board last year. The effort amounted to a settlement consisting of three new board directors – two appointed by the group and one by Kohl’s. Swartz predicts the board won't be let off as easy this time around.
"Whatever happens, I don’t see how Macellum can just 'throw in the towel' and accept a compromise like last year unless it’s favorable," he said.
At least one factor currently working in the board's favor is the fact that Kohl's share price has remained relatively steady since Friday's announcement, hovering around $59-60. That's another outcome that Swartz did not foresee but attributes to investors' expectations of higher bids. Prior to the announcement, Swartz had predicted Kohl's stock would fall about $15 if the company rejected the bids. He said it would make the board look like they were not fulfilling their duty to work in the interest of shareholders.
In an analyst note Friday, Swartz questioned the board's "risky" decision to reject legitimate offers "in favor of an uncertain strategy."
Now, Kohl's board will have to push its strategy even harder to maintain the favor of shareholders.
"The company usually does have an advantage since it can spend company money on PR and other efforts to win; most shareholders usually believe the company’s story (or they probably wouldn’t own the stock); and smaller shareholders don’t pay that much attention," said Swartz in an email.
However, he warns, Macellum could rally enough support from institutional shareholders and launch their own marketing campaign to grab the attention of smaller shareholders.
Another possibility is that Acacia Research Group and Sycamore Partners could raise their bids and go public with them. As part of Kohl's initial rejection, the company adopted a limited-duration shareholder rights plan, also known as a "poison pill" to prevent a hostile takeover. But it does not prevent the board from “considering an offer that recognizes the value of the company.”
Unfortunately for Kohl's, given the troubled track record of private equity firms acquiring retail, Swartz doesn't see the benefit of an outcome in which Kohl's is purchased by either of its two known suitors.
"If you look at the history of private equity firms buying retailers, they will often just extract as much cash from the business as they can," he said. "It’s rare that they really turn around a retailer and make it healthy and bring it out later as a healthier business."
Private equity firms typically look for retailers that are struggling but could still generate a significant return. That's the case with Kohl's - plus there's the added bonus that Kohl's owns more than 400 of its 1,162 department stores locations across the U.S. Macellum estimates the value of Kohl's real estate assets at $7 billon to $8 billion and has repeatedly pushed for a large-scale sale-leaseback transaction as a way to create shareholder value, but Kohl's has continued to shoot down the idea. Swartz said selling Kohl's properties to pay rent instead of owning would be a disadvantage in the long run.
Plus, the background of the two suitors is questionable. New York-based Sycamore partners has a history of retail acquisitions, including Staples in 2017 and Coldwater Creek in 2014. It took Belk department stores private in 2015, but the company has since restructured. Meanwhile, Acacia isn’t as well known and doesn't have experience in retail, having only made offers for small technology companies. However, Starboard reportedly has financing.
While the future of Kohl's could be in jeopardy if it's taken private, it'll get more and more difficult for the board to justify rejecting higher bids.
"If you're on Kohl's board, you have no real incentive to block a sale because you may end up out of a job anyway because the activists may take over the board and get rid of you. That's a real risk in this case," said Swartz. 
