Big Lots in Play Poised to Bring $1 Billion Windfall: Real M&A
Big Lots Inc., the discount retailer exploring a possible sale, may reward shareholders with a windfall of more than $1 billion as demand for discontinued and overproduced brand-name goods lifts profit to a record.
Retailers have been paid a median of 10.2 times earnings before interest, taxes, depreciation and amortization in the past decade’s acquisitions, according to data compiled by Bloomberg. Using that multiple, Big Lots’ equity would be worth $4.6 billion, based on analysts’ estimates for $459.8 million in Ebitda this year. That’s 52 percent more than the Columbus, Ohio-based company’s market capitalization, the data show.
A sale may help Chief Executive Officer Steve Fishman recoup the value lost as shares of rivals gained twice as much in the past year. The buyer would get a retailer analysts say will benefit as consumers seek low-priced goods amid a recovery from the longest recession since the Great Depression. Big Lots, which was approached by Bain Capital LLC and Thomas H. Lee Partners LP, hired Goldman Sachs Group Inc. to study its options, according to a person with knowledge of the situation who declined to be identified because the matter is private.
Fishman “has really improved the performance of the company, but unfortunately Wall Street hasn’t really recognized the value that he has brought to Big Lots,” said Justin Akin, a money manager at Louisville, Kentucky-based River Road Asset Management LLC, which oversees $4 billion, including 2.5 percent of Big Lots’ shares. “This is a market leader that’s going to prosper even when times are tough.”
Big Lots buys closeout and overstocked items from furniture to toys and small appliances and sells them at a discount at its 1,400 stores. The company posted five straight years of growth on an adjusted net income basis since Fishman, 60, became chief executive officer in July 2005. He has a history of cleaning up businesses prior to a change in ownership, according to Ronald Bookbinder, an analyst with New York-based Benchmark Co.
Fishman led Frank’s Nursery & Crafts Inc., the largest U.S. lawn-and-garden products retailer, during bankruptcy, and ran retail-chain Pamida before a sale to ShopKo Stores Inc. in 1999.
At the industry’s historical takeover multiple of 10.2 times Ebitda for deals of at least $500 million, an acquisition of Big Lots would value the equity at $4.6 billion, based on analysts’ profit estimates for this fiscal year. That would represent a per-share price of about $61, almost double the average price of $32.06 in the 20 days prior to Feb. 7.
Shares of Big Lots advanced 2 percent to $40.77 in New York Stock Exchange trading today. The Standard & Poor’s 500 Index was little changed.
Dan Wewer, an analyst who covers retailers at St. Petersburg, Florida-based Raymond James & Associates Inc., says Big Lots may sell for $54 a share, or a premium of 68 percent. Only two takeovers in the retail industry have commanded higher prices in the past decade, data compiled by Bloomberg show.
Wewer based his estimate on a takeover multiple of about 9 times Ebitda, versus the estimated 11 times Ebitda that KKR & Co. paid for Dollar General Corp. in July 2007. Big Lots’ profitability and “attractive” balance sheet would make it comparable to Dollar General when it was taken private, he said.
Big Lots generated free cash flow of 6.6 percent of sales in the past 12 months, the second-highest among U.S.-traded discount retailers with more than $1 billion in market value, according to data compiled by Bloomberg. Chesapeake, Virginia- based Dollar Tree Inc. had a ratio of 8 percent. Big Lots had $78 million in net debt at the end of October, the data show.
“We thought that a private equity firm could make the numbers work,” said Pat Becker, principal of Becker Capital Management Inc. in Portland, Oregon, which oversees $2.4 billion. “It’s a great free cash flow generator and that was our attraction to the name. Private equity guys are looking for strong free cash flow and not much debt.”
Becker bought 256,890 shares of Big Lots in the fourth quarter, in part betting that the company will be taken over by a leveraged buyout firm.
Executives at Big Lots didn’t return calls seeking comment.
Shares of Big Lots have rallied 20 percent since Feb. 4, the last day of trading before a person with knowledge of the situation said that the company received interest from Boston- based Bain Capital and Thomas H. Lee and was working with Goldman Sachs of New York.
Big Lots climbed 154 percent from the end of 2005 through 2010, versus an 11 percent gain for retailers in the Standard & Poor’s 500 Index. Bentonville, Arkansas-based Wal-Mart Stores Inc., the world’s largest retailer, advanced 15 percent.
KKR’s return on Dollar General may provide a model for potential private equity bidders.
Dollar General completed an $824 million initial public offering in November 2009. The IPO gave the Goodlettsville, Tennessee-based merchant an enterprise value, or the sum of Dollar General’s stock and net debt, of about $11 billion, data compiled by Bloomberg show. That’s about 50 percent more than the $7.3 billion total value of the takeover, KKR’s last leveraged buyout before credit markets froze in August 2007.
Dollar General paid a dividend of $239 million to its owners in September 2009.
Using KKR’s own valuation models, the “fair value” of Dollar General’s common stock was $12.95 each at the end of May 2009, according to filings with the Securities and Exchange Commission. Dollar General sold shares at $21 each in the IPO and the stock has since climbed 33 percent to $27.91.
While the 18-month recession that ended in June 2009 was the longest since a 43-month slump during the Great Depression, according to the Cambridge, Massachusetts-based National Bureau of Economic Research, discount retailers benefited as consumers turned to lower-priced goods.
In 2009, when household spending dropped 1.2 percent in the greatest decline since 1942, shares of Big Lots doubled. The company reported a 34 percent increase in per-share adjusted earnings that year, data compiled by Bloomberg show.
Big Lots underperformed its competitors in the past year as food sales fell in the third quarter because of gaps in its product selection, according to Brian Sozzi, an analyst with Wall Street Strategies Inc. in New York.
As a private company, Big Lots would have the time to turn around its food business, which draws more consumers into stores to also buy furniture and clothing, he said. That would make it an attractive target for private equity bidders.
“Private equity is sniffing around the retail sector, trying in earnest to dig up a mispriced gem,” he said. “When you’re publicly traded you don’t have the benefit of time.”
Stock Exchange Deals
Elsewhere in mergers and acquisitions, Deutsche Boerse AG said yesterday it was in advanced talks to buy NYSE Euronext in an all-stock transaction that would create the world’s biggest exchange operator, accelerating a day of takeovers that began with London Stock Exchange Group Plc’s acquisition of Toronto- based TMX Group Inc.
The combined organization of Deutsche Boerse and NYSE would be home to publicly traded companies worth about $15 trillion, or 28 percent of global stock-market value, according to data compiled by Bloomberg. Duncan Niederauer, New York-based NYSE Euronext’s chief executive officer, would have the same job, according to a statement. Frankfurt-based Reto Francioni, CEO of Deutsche Boerse, will be chairman. Deutsche Boerse will own about 59 percent to 60 percent of the joined entity.
The talks between NYSE and Deutsche Boerse and the agreement between LSE and TMX follow Singapore Exchange Ltd.’s October offer to buy ASX Ltd., operator of Australia’s main bourse, for A$8.4 billion ($8.5 billion).
London Stock Exchange Group said that it agreed to buy Toronto-based TMX Group for about $3.2 billion as the companies cut costs to counter market share losses.
Encana Corp. of Calgary, Canada’s largest natural-gas producer, agreed to sell a 50 percent stake in the company’s Cutbank Ridge business to a unit of Beijing-based PetroChina Co. for C$5.4 billion ($5.44 billion). The agreement creates a joint venture with PetroChina International Investment that includes assets in British Columbia and Alberta.
There have been 2,610 deals announced globally this year, totaling $223.3 billion, a 24 percent increase from the $179.9 billion in the same period in 2010, according to data compiled by Bloomberg.