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

A Kohl's storefront featuring its new Sephora shop-in-shops. Credit: Kohl's Corp.

Last updated on June 13th, 2022 at 02:10 pm

If Menomonee Falls-based Kohl’s Corp. agrees to be sold to Franchise Group Inc., Delaware, Ohio-based Franchise Group says it would fund the estimated $8 billion purchase of Kohl’s with $1 billion from increasing the size of its secured debt facilities and the rest of the financing would be “provided on the basis of the real estate assets of Kohl’s Corp.,” according to a statement from the company.

“Other than the increased secured debt facilities of Franchise Group, none of the financing for the transaction is expected to be recourse to Franchise Group,” according to the release.

Kohl’s and Franchise Group announced Monday that they have entered into a three-week exclusive negotiation period for a deal in which Franchise Group would acquire Kohl’s for $60 per share.

Kohl’s has 1,162 department store locations across the U.S. and owns 400 of those properties, according to SEC filings. It’s been estimated that the company’s real estate is worth $7 billion to $8 billion.

Franchise Group is the owner and operator of several franchised and “franchisable” businesses, including retail brands Pet Supplies Plus, American Freight, The Vitamin Shoppe, Badcock Home Furniture & 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 franchised 1,221 stores, according to its 10-K 2021 annual report.

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

Both Franchise Group and Kohl’s noted the three-week negotiation period does not guarantee a purchase deal or transaction. The possible sale would be subject to approval by both companies’ boards of directors. Kohl’s said the purpose of the exclusive period is to allow Franchise Group and its financing partners to finalize due diligence and financing arrangements and for both businesses to complete negotiations around binding documentation.

Franchise Group is just one of several interested parties that have made offers to purchase Kohl’s in recent months. Since January, the company – through Goldman Sachs – has engaged with about 25 bidders. Private equity investor Sycamore Partners also made an offer around the same time Franchise Group did, according to the Wall Street Journal, for mid-$50s a share.

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

The department store chain’s board has been under mounting pressure to consider a full or partial sale of the company since early this year, when it rejected takeover offers from 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 move prompted a proxy fight with activist investor Macellum Capital Management, which ultimately lost the battle for boardroom control after shareholders voted to re-elect all 13 of Kohl’s incumbent directors over Macellum’s slate of 10 candidates.

Shortly after, two executives exited Kohl’s: Greg Revelle, chief marketing officer, and Doug Howe, chief merchandising officer.

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

The company noted in its recent quarter one earnings news release that “multiple bidders have been invited to a data room containing more than 550,000 pages across more than 55,000 documents, as well as meetings with management.”

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Maredithe has covered retail, restaurants, entertainment and tourism since 2018. Her duties as associate editor include copy editing, page proofing and managing work flow. Meyer earned a degree in journalism from Marquette University and still enjoys attending men’s basketball games to cheer on the Golden Eagles. Also in her free time, Meyer coaches high school field hockey and loves trying out new restaurants in Milwaukee.

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