Aaron’s Holders Bet $300 Million on Better Deal: Real M&A

Aaron’s Inc. shareholders are so convinced private-equity suitor Vintage Capital Management LLC will boost its takeover bid for the appliance-leasing company that they’re willing to risk $300 million.

The provider of rent-to-own sofas, washing machines and laptops yesterday traded 3.1 percent above a $30.50-a-share bid from Vintage last month, signaling traders are betting a deal will get done at a higher price. While the takeout premium is low compared with similar transactions, Vintage said it’s willing to consider raising the price if Aaron’s engages in talks. Without a deal, Aaron’s stock may fall back to its level before the offer was made public, which would erase more than $300 million in market value, according to data compiled by Bloomberg.

An offer for $35 to $40 a share would be a better reflection of the company’s earnings potential and attractive cash flow, Gilford Securities Inc. said. Even though Aaron’s board added a new hurdle to a hostile takeover last month, Vintage and activist hedge fund Starboard Value LP are each nominating a slate of directors. SunTrust Banks Inc. sees an increasing likelihood of a sale to Vintage, which is led by a former Aaron’s franchisee and also owns a competitor.

Vintage is “essentially a strategic buyer and they’re committed to doing the deal,” Sachin Shah, a special situations and merger-arbitrage strategist at New York-based Albert Fried & Co., said in a phone interview. “The fact that they’re willing to raise the offer and the fact that Starboard is in there adds credibility that something is going to happen.”

Vintage Details

The offer, which Vintage disclosed in a filing Feb. 7, values Atlanta-based Aaron’s at about $2 billion after subtracting the company’s $200 million of net cash, data compiled by Bloomberg show. The company had an enterprise value yesterday of $2.06 billion.

Vintage said that it had made three other bids privately to Aaron’s board since 2011. After continually being rebuffed, the Orlando, Florida-based investment firm opted to take a 10 percent stake and publicly disclose its latest bid to get shareholders on its side.

Aaron’s responded by retaining Goldman Sachs Group Inc. as a financial adviser and forming a transaction committee to evaluate the proposal and other options for improving the company’s long-term value. A representative for Aaron’s declined to comment on the status of the evaluation or whether the company has received interest from other buyers.

Low Premium

At $30.50 a share, Vintage would be paying 12 percent more than Aaron’s average price in the 20 days leading up to the offer announcement. Acquirers have paid a 28 percent premium on average for U.S. rental companies and retailers of appliances, consumer electronics and home furnishings, the data show.

Brian Kahn, founder and managing member of Vintage, said in an interview last week that he’d “love to sit down and negotiate with the company” but that Aaron’s won’t return his calls. Kahn said in a March 11 interview that he would also support a transaction with another suitor if it were willing to pay more than Vintage.

Shareholders will vote at the next annual meeting on the director nominees that Vintage and Starboard have submitted, Aaron’s said last week. Two board members are up for re-election this year -- Ron Allen, the chairman and chief executive officer, and Ray Robinson, the lead director.

Board Nominees

Among Vintage’s candidates for those two spots are Ken Butler, who was chief operating officer at Aaron’s until last May, and three former Aaron’s franchisees, including Kahn. A representative for Starboard didn’t respond to a request for comment on its board slate or size of its stake.

Up until a few years ago, Aaron’s was controlled by founder Charles Loudermilk. A share reclassification in 2010 reduced his stake to 8.9 percent from more than 60 percent. Loudermilk retired as chairman in 2012, the year after his son Robert Loudermilk stepped down as CEO.

“We’re really just one step removed from this being a tightly controlled, almost family-owned business,” Brad Thomas, a New York-based analyst at KeyCorp, said in a phone interview. “It’s going to be real interesting to see what happens. It sends a very negative message if a CEO is elected off of his board. That being said, Aaron’s does not have to bow to the demands of Vintage Capital.”

The appliance company changed its bylaws last month to say that investors need the support of two-thirds of shareholders to call a special meeting. The threshold was previously 25 percent.

Business Slowdown

Even with the additional hurdle, SunTrust’s David Magee says shareholders may be interested in exploring new solutions, such as a sale, as the business struggles.

Aaron’s net income fell 30 percent last year, in part due to weak demand from low- to middle-income customers who still face economic pressures. Revenue climbed 1 percent, the slowest pace since at least 1996, data compiled by Bloomberg show.

“Our sense is that the probability of a deal being done is growing,” Magee, an Atlanta-based analyst for SunTrust, wrote in a March 7 report. With Aaron’s hiring Goldman Sachs and forming a committee to review the offer, “everything seems to be on the table now” and “we struggle to think of a more appropriate buyer” than Vintage, he said.

The rising stock price shows traders are betting either that another buyer will come in to top Vintage’s bid or that Vintage and Aaron’s will agree on a deal at a higher price. The shares closed at $31.45 yesterday.

Aaron’s climbed 2 percent to $32.08 today.

Another Buyer

Another logical acquirer is Rent-A-Center Inc., Aaron’s closest competitor, Thomas of KeyCorp said. An industry buyer such as Rent-A-Center could probably afford to pay a higher price than a private-equity firm because of the potential for synergies, though such a tie-up would likely be scrutinized by the Federal Trade Commission, he said.

“I think there would certainly be interest,” Thomas said. “Why wouldn’t you look at an accretive acquisition if you could do it?”

Even if Rent-A-Center paid $40 a share in cash to buy Aaron’s, the deal would immediately boost earnings per share by more than 30 percent, data compiled by Bloomberg show. That’s without assuming any cost cuts.

While Aaron’s faced challenges last year, the outlook remains intact, said Robert Straus, a New York-based senior analyst for Gilford Securities.

Cash Yield

Aaron’s still threw off more cash relative to its stock price in the past 12 months than almost every other U.S. retailer or rental company larger than $1 billion, according to data compiled by Bloomberg. Only GameStop Corp.’s free-cash-flow yield of 18 percent tops Aaron’s at about 10 percent.

Net income at Aaron’s is projected to rebound 13 percent this year to about $137 million, before rising to about $166 million in 2016, according to the average of analysts’ estimates compiled by Bloomberg.

“I believe you have to value the company on a more normal earnings cycle, which easily gets you to $35 to $40 a share,” Straus said in a phone interview. “Long term, Aaron’s has ample growth opportunities. It’s an attractive, steady cash flow business and will be for years to come. Low $30s does not get this deal done.”