Bidding Process Seems Likely to End in Sale of Kohl's

After a year of activist activity, which we've highlighted in prior notes, Kohl’s (KSS) has confirmed that there are offers from financial buyers to take the company private. This caused its share price to jump more than 30% on Jan. 24. One of the offers is from an obscure firm, Acacia Research, which has reportedly offered $64 per share. Acacia has no apparent experience in retail (most of its investments are in technology) and a market capitalization of only about $200 million, but it is backed by activist hedge fund Starboard Value, which reportedly has financing. There are also reports that private equity firm Sycamore Partners is interested in buying Kohl’s. Sycamore has experience in retail, including having taken Kohl’s department store peer Belk private in a $3 billion deal in 2015.

As we believe that there is a possibility of higher bids well above our current $54 fair value estimate and that Kohl’s is a no-moat firm struggling against intense competition, we think the board will need to consider seriously any credible offers. Bidders are likely attracted to Kohl’s consistent cash flow and extensive real estate holdings, which activist shareholder Macellum recently valued at $7 billion-$8 billion. Starboard staged a short-lived activist campaign against no-moat Macy’s in 2016, in which it pushed the retailer to monetize its real estate, and Reuters reports that the hedge fund and Acacia may partner with Oak Street Real Estate Capital to sell Kohl’s properties if a deal is consummated. We believe Macellum, which recently threatened a proxy fight, and the other activist shareholders will support a takeover as they have expressed dismay over Kohl’s performance under CEO Michelle Gass.

While Kohl's is now trading above our fair value estimate, we do not view bids above $70 per share as unreasonable. Indeed, our fair value estimate for Kohl’s at the outset of the pandemic in 2020 was $72. Our capital allocation rating is Standard.