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Retail Takeovers: Rumors Run Rampant

By Jeanine Poggi
Published: April 29, 2010

NEW YORK (TheStreet)—Retail takeovers, or at least the potential for such deals, are energizing the market.
Over the last few months, several big-name companies have been thrown into the spotlight as possible buyout targets, sending stocks on the upswing in the process.
As the consumer slowly, but surely returns, with retail sales up 1.6% in March, the conditions are ripe for prime buying opportunities for private equity firms and strategics to uncover cheap investments.

Indeed, private equity firms need to do something with the cash they are sitting on—and companies with plump balance sheets will be looking for ways to expand their channels of distribution and cache, says James Grayer, corporate partner at Kramer, Levin, Naftails & Frankel.

“Historically, it is markets like these where acquisitions make the most sense and offer the most value, not the market of 2006,” says Joe Johnson, chair of law firm Goodwin Procter’s M&A/Corporate Governance practice.

Still, the floodgate for deals is hardly open yet—and isn’t expected to be thrown wide open until the second half of the year and into 2011. This may be a buyers’ market, but it is certainly not a market for sellers—which means discussions will go on for longer, Grayer says.

Sellers will want to hold out for a better prices, not wanting to be handicapped by troughs in their business caused by the economic downturn, while buyers will want to take advantage of the cheap prices of beaten-down companies before the market returns in full force.

Whether or not deals will actually come to fruit remains to be seen, but the mindset for acquisitions has certainly returned. Here are some retailers that could be up for grabs… Rite Aid

Rite Aid(RAD)takeover chatter arose after Walgreen(WAG)purchased Duane Reade in February, leading investors and analysts to start envisioning other possible deals in the drugstore segment.

Despite Rite Aid’s internal problems, like its mounds of debt, the drugstore is a strong play, says IBISWorld analyst Toon van Beeck.

As Walgreen(WAG)and CVS Caremark(CVS) battle to be the dominant drugstore player, if either one were to acquire Rite Aid’s 11.9% market share they would easily overtake the other, van Beeck says.

Walgreen has already said that it won’t stop looking for acquisitions, even after its Duane Reade purchase.

But both Walgreen and CVS might come under regulatory fire if they attempted to acquire Rite Aid, says Ryan Thomas, member of the Corporate and Securities practice at Bass, Berry & Sims.

“I don’t think all of its assets could be sold off to a strategic buyer,” he says. “But Rite Aid can try to shed a meaningful portion of its stores, which Walgreen and CVS would pick up.”

Wal-Mart(WMT) may also be looking into purchasing Rite Aid. The discount giant has a strong pharmacy and drugstore business, but it is nowhere close to being a major player. It could gain this leverage in the market with Rite Aid.

This could also be a prime time for Rite Aid to go private. “It would give Rite Aid the opportunity to clean up out of the public eye and then go up for sell, which is what happened with Duane Reade,” Thomas says. “This is more realistic than a strategic purchase.”

Regardless of who may or may not be interested in Rite Aid, van Beeck says that decisions about the company’s future will need to be made sooner rather than later unless it experiences a miraculous recovery. RadioShack

RadioShack(RSH) is reportedly being eyed by potential suitors, most notably Best Buy(BBY).

In some respects, a deal between the two electronic retailers would make sense. Best Buy recently announced that it plants to open 1,000 mobile stores. RadioShack’s mobile business constitutes about 40% of its sales, including mobile accessories.

If Best Buy were to acquire RadioShack it would give it an immediate presence in the mobile market and eliminate competition, says John Tomlinson, analyst at Majestic Research.

RadioShack would be a cheap buy that has upside potential, especially if Best Buy utilizes its own corporate strategies to reinvigorate the other 60% of RadioShack’s business.

But Keybanc analyst Bradley Thomas says Best Buy already has the facilities to expand its mobile business without RadioShack. “The two concepts are also very different in terms of strategies and footprints,” he says. “I am not surprised to see speculation, but I would be surprised to see a deal actually happen.”

Private equity also doesn’t seem like a viable option, Thomas says. “[PE] takeover targets generally are those that have opportunities to cut costs, improve management team and unlock value once out of the public eye. I don’t see what private equity can do with RadioShack.”

Thomas praises CEO Julian Day’s efforts to cuts costs and manage the company for a turnaround. “While strong cash flows could support a leveraged buyout, there are some better names out there for an LBO,” he says. GameStop

GameStop(GME) is a very likely takeover possibility, Needham analyst Sean McGowan says.

While McGowan didn’t name any potential suitors, Best Buy has also been rumored to be looking into the video game retailer.

“GameStop has a dominant position, generates a lot of cash, and won’t get crushed by the competition,” McGowan says. “It could throw out even more value if it is bought and doesn’t open more stores. There is a lot a buyer could do here.”

GameStop also holds a 50% market share when it comes to popular new releases. During the first week of a new games’ launch, more people will go to GameStop to purchase the title then anywhere else, McGowan says.

Still, there are negative connotations when it comes to the video game market. Some investors think with the emergence of digital downloads, GameStop will eventually follow the doomed path of Blockbuster(BBI), McGowan says.

Granted, the market will inevitably one day be smaller for physical video games, but there will always be business for consoles and other hardware, McGowan says.

GameStop could also successfully adapt to the digital shift by adding value to aggregated digital content. Supervalu

Last month LBO rumors surrounded grocery chainSupervalu(SVU), which has operated under several names, including Albertsons and Biggs (pictured here.) Reports claimed the company could get $22.50 a share.

Since then, however the chatter has died down.

Earlier this week, Supervalu said it returned to profit in its fourth quarter, but posted 2011 guidance that fell short of Wall Street’s estimates. The company also has about $8 billion in long-term debt. Williams-Sonoma

Williams-Sonoma(WSM) saw shares and options activity soar earlier this week, as investors’ interest piqued on news that the home furnishing retailer could be acquired.

This isn’t the first time talks of a Williams-Sonoma buyout have made headlines. The company reportedly turned down an offer fromStarbucks(SBUX)back in 1999.

Starbucks, it seems, currently has its eyes on another company, Jamba(JMBA), owner of Jamba Juice. Shares of Jamba have gained 5% this week over the possibility of renewed interest from the coffee giant.

As for possible suitors for Williams-Sonoma, it doesn’t seem like anyone is knocking on its door right now. Borders

The takeover chatter regardingBorders(BGP) arises nearly every time the book retailer falters and then manages to start to recover. This time is no exception.

The company reported earlier in the month that its fourth-quarter profit doubled and it was able to repay its $42.5 million loan to investor William Ackman.

One potential buyer has always been Barnes & Noble(BKS), but that company is having problems of its own. Another buyer often mentioned on message boards is Canadian book retailer Indigo, which could use Borders to establish as presence in the U.S.

At least this much can be said: Barnes & Noble and Borders are trading at cheap historical multiples, which make both of them good targets for a leveraged buyout.

-- Reported by Jeanine Poggi in New York.