Big Lots Cash Seen Luring Bidders as CEO Leaves: Real M&A

Two years after failing to secure a deal, Big Lots Inc. is once again a potential target of private equity firms as its chief executive officer retires.

Big Lots, which explored a sale in 2011, lost more than a third of its market value in the last 10 months as the company cut forecasts and said CEO Steven Fishman will retire amid a probe over his stock trades. The seller of discontinued and overproduced goods is valued at 5.3 times its estimated fiscal 2014 earnings before interest, taxes, depreciation and amortization. That’s the cheapest among similar-sized discount retailers, according to data compiled by Bloomberg.

With the $1.8 billion company throwing off more cash relative to its share price than any of its U.S. rivals, Wedbush Inc. said Big Lots still could tempt private equity firms, given its low valuation. The stock-sale investigation also could make investors in Columbus, Ohio-based Big Lots more open to a bid of at least $40 a share, a 28 percent premium, said shareholder Centaur Capital Partners LP.

“If someone wanted to make a play for it, now would be the time,” Zeke Ashton, managing partner at Southlake, Texas-based Centaur Capital, said in a telephone interview. “The stock is cheap, there’s a CEO transition going on and there is probably some shareholder attitude of openness to getting a fair price because what we have now is a lot of scrutiny regarding the CEO’s stock purchases.”

Andrew Regrut, Big Lots’s director of investor relations, didn’t respond to a phone message seeking comment about the company’s receptiveness to a sale.

Drawing Interest

Big Lots surged in February 2011 when people familiar with the situation said the company was working with Goldman Sachs Group Inc. to explore a sale after being approached by Bain Capital LLC and Thomas H. Lee Partners LP. The Wall Street Journal reported three months later that Big Lots abandoned the plan for a sale after bids came in lower than anticipated.

Last week, DealReporter said Big Lots is once again drawing interest from private equity firms, citing industry bankers that it didn’t identify, who also said the company didn’t appear to have begun a formal sale process and hadn’t hired a financial adviser.

The report of renewed interest comes after Big Lots’s shares slumped in recent months, falling 33 percent from their high last year of $46.81 to $31.15 yesterday. Last year, the company scaled back sales and profit estimates, shuffled management and reported revenue declines at stores open more than a year.

Today, Big Lots shares gained 2.2 percent to $31.82, its highest closing level since Sept. 14.

‘Reasonable Time’

Big Lots said in December that Fishman, who took over as CEO in July 2005, would retire as soon as a replacement is named. The same week, the company said Fishman was under investigation by the U.S. Justice Department over stock trades he made, and that he faced an inquiry into the matter by the Securities and Exchange Commission.

“A change of control or a situation where a company has been destabilized in that way, those are situations in which a private equity firm might take another pass at a company that has put out feelers in the past,” Bill Mann, chief investment officer of Motley Fool Asset Management LLC, said in a phone interview from Alexandria, Virginia. His firm oversees $350 million, including Big Lots shares. “It’s a reasonable time for an LBO firm to look at it and see if they can take it out at a bargain.”

Cheap Stock

After the decline, Big Lots’s enterprise value yesterday was 5.3 times its estimated Ebitda for the fiscal year ended next January, less than half the average multiple of 10.9 among U.S. mass merchants with a market value between $1 billion and $20 billion, data compiled by Bloomberg show.

“It really is cheap,” Joan Storms, a Los Angeles-based analyst for Wedbush, said in a phone interview. Big Lots is also attractive for a buyout because it has the cash flow to support added debt, she said.

The company has a free cash flow yield -- a measure of how much cash from operations a business generates relative to its share price -- of about 5.5 percent, the highest in the group.

While Big Lots’s revenue is projected by analysts to reach new highs every year through at least fiscal 2017, competition from so-called dollar stores could cloud its outlook, said Bradley Thomas, a New York-based analyst at KeyCorp.

Dollar General Corp., the largest U.S. dollar-store chain, operates more than 10,000 U.S. outlets and plans to open another 635 stores this year. Big Lots operates about 1,500 stores in the U.S.

Muted Outlook

“It’s certainly not an expensive stock, but I think the outlook for growth and expectation of return on investment is muted by the business model and the competitive landscape,” Thomas said. “Retail is a zero-sum game, and it’s tough to go up against these companies that are opening a lot of stores.”

Big Lots’s board probably wouldn’t consider a sale until a new CEO is named, Motley Fool’s Mann said.

Still, with the stock-sale probe depressing Big Lots’s valuation, some stockholders might be more willing to accept a buyout, Centaur Capital’s Ashton said.

“Probably there are some shareholders out there who would say, ‘Hey, we’re open to having somebody pay us $40 or $42,” Ashton said.

A deal at $40 a share would equate to a price tag of $2.7 billion, including net debt.

While the challenges Big Lots faced in the past year have hurt its stock price, the longer-term outlook and potential for improvement could make it attractive, Motley Fool’s Mann said.

“You have a situation where there’s uncertainty on a bunch of different plains, and uncertainty almost definitively causes the price to go down,” he said. “But there’s nothing about Big Lots that says it’s an impaired franchise in any way, shape or form.”

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