Tag: FRG

Seeking Alpha rarely, in my opinion, has insightful analysis. However this morning someone linked to an article that took a stab at putting together all of the potential pieces to estimate the financials of the merged entity. This person summarized their output as:

The deal would be funded with no equity, only debt and real estate sale-leasebacks. If it closes, both FCF/share, and the $2.50 dividend, should more than double.

Seeking Alpha

Keep in mind Franchise currently sells at 8x earnings.

The layperson math of buying something (Kohl’s) at an eye-popping un-levered yield (~$1.8B of EBITDA for ~$3B) is going to look incredibly accretive to any company. Is there a stable business behind it or is it the next Sears?

The article outlined the biggest risk as:

…the biggest risk facing FRG would be a massive recession causing retailers to suffer. If this were to happen in the near term, then FRG would also be dealing with an increased debt load at the same time. 

Seeking Alpha

Make no mistake, a major consumer recession would hit this business hard. And while leverage makes fortunes. Leverage also kills.

If this couldn’t get more complicated for our own portfolio, it was also reported by the NYPost (which apparently doesn’t double / triple source), that Apollo is in talks to provide financing for the deal. Markets always keep it interesting.

Disclosure: We own shares of Franchise Group and Apollo, this is not investment advice. Do your own work.

One of our holdings, Franchise Group, has been a part of a dramatic M&A process involving Kohl’s, the department store.

Yesterday they announced that they have a ~3 week exclusivity period under the guise of a ~$60 / share bid for the company. I’m doing this off the top of my head but Franchise has an enterprise value of about ~$3B to Kohl’s. As such, it’s a bit of a python swallowing a horse. Here’s the press release:

In reality, a large portion of Kohl’s enterprise value is represented by the dirt under it, the un-levered real estate. Franchise indicated that it intends on financing the deal with $1B from its credit facility, effectively cross-collateralizing other assets in its portfolio to fund the equity portion of the deal. It intends to fund the rest, I presume, with a sale-leaseback of the real estate and keep the existing Kohl’s corporate debt outstanding.

I have no opinion on the transaction, as I really have no opinion on any transactions that any of the private equity managers we are invested with (Franchise is effectively a publicly traded private equity fund) before they close. The investment was in the managers, and after the fact, we can evaluate whether they have been doing a good job or not. To evaluate something without any of the real behind the scenes data is for my own purposes, futile, as the premise in investing in them is they make investments that most people don’t see value in, thereby creating alpha / outperformance.

All we really do have is the following from the prior earnings call when asked about Kohl’s specifically:

All we really have to go off of is their prior track record, which one could describe as adequate to very good to date with the caveat that it’s still early with Franchise being a newer company. Its most recent transaction was what one could describe as financial alchemy, as it executed sale-leasebacks on the real estate and sold the consumer receivables to reduce their basis to less than $0. What is less clear is their longer term ability to grow the businesses they own with repeatability – and this is more important than financial alchemy.

What is quite certain is the next month should be an interesting one for Franchise, and the next year, given all of the recent transactions, should be telling as to how they manage the materially larger portfolio than only a few years prior.

Disclosure: We own shares of Franchise Group, this is not investment advice. Do your own work.