Chico's Rejects Buyout Offer With a Catch

An interesting situation has developed at women's fashion boutique Chico's (NYSE: CHS). Private equity firm Sycamore Partners in early May made an unsolicited offer to take Chico's private at $3.50 per share in cash. The catch is that at the time the offer was made, Chico's stock was already trading 5% above the buyout price.

Although the buyout offer didn't have an attractive price, it comes at a time when Chico's is facing significant challenges to turn around its business. The company's stock price is more than 70% lower than it was five years ago and could continue trending lower. Perhaps $3.50 per share is too low now, but a similar offer may be worth exploring if Chico's continues to see its stock slide.

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Sycamore's offer

Sycamore Partners made quite the splash on May 10. The private equity firm disclosed a 6.6% ownership stake in Chico's and expressed its interest in acquiring the rest of the company for $3.50 per share.

This isn't the first time Sycamore has tried to acquire Chico's. In 2015, the private equity firm sought to take the company private when it had a market cap of nearly $2.8 billion. (It now has a market cap of around $425 million.) However, Sycamore was unable to secure financing and ended up walking away from the deal.

In April of this year, Sycamore privately made an offer to acquire Chico's at $4.30 per share, which was above the stock's price at that time, but Chico's management said it rejected the offer, determining that the proposal "substantially undervalued Chico's FAS and was not in the best interests of Chico's FAS shareholders." Sycamore partners wrote that the company has "declined to engage with us."

Why did Sycamore's offer decrease from $4.30 to $3.50? The company believes that Chico's business is deteriorating and will continue to decline in value unless changes are made.

One week after receiving Sycamore's latest offer, Chico's board of directors announced that it unanimously rejected the offer. This is no surprise, given the lowball price. However, Sycamore's 6.6% ownership stake makes it one of the company's largest shareholders, so it is very likely that the drama will continue.

Chico's tough road ahead

Chico's shareholders have had a rough couple of years. The stock price has been depressed because the business has seen its revenue and earnings fall precipitously for several years. Much of the blame for Chico's poor performance can be attributed to the company's reliance on mall-based stores, which have seen a steady decline in foot traffic due to changing consumer shopping preferences.

In response to these challenges, Chico's announced a plan to close 250 underperforming stores over the next three years in addition to other cost-saving efforts. The company operates about 1,400 stores in the U.S. and Canada. It plans to reinvest the savings from closed stores and cost-cutting into an initiative to grow e-commerce sales.

In recent years, Chico's has announced partnerships with e-commerce channels including ShopRunner and Amazon in addition to a partnership with TV network QVC. Although bringing the company's merchandise online and onto TV has brought the brand to new customers, these partnerships have yet to materially improve Chico's financial results.

The turnaround initiatives are welcome, but Chico's also has a leadership problem. In April, the company forced out its CEO. It appointed board member Bonnie Brooks, a former president and CEO of Hudson's Bay Company, to serve as interim CEO while it searches for a replacement. The company has a minefield of challenges and needs a strong leader now more than ever. That being said, even if a capable CEO is identified, the company's problems won't magically disappear.

In its offer letter, Sycamore Partners stated: "The recent decision to terminate the CEO suggests that there are serious issues in the business. We believe that the Company's financial performance will continue to deteriorate absent meaningful changes."

Sycamore makes a great point worth considering. Chico's has a tough road ahead if it wants to be successful as an independent publicly traded company. Selling itself to a capable operator is a viable alternative if it continues to struggle to find its footing.

What now?

Although Chico's has rejected the latest takeover attempt from Sycamore, given that it is one of the largest shareholders, it's safe to say Sycamore isn't going anywhere. The two parties could come to an agreement at some point if the board changes its mind or there is enough pressure from other large shareholders.

It is also a good indication for shareholders that there is buyout interest at a level near the current price. As a financial buyer (as opposed to a strategic buyer), Sycamore is highly opportunistic and would only make an offer it felt it was an attractive price.

By making its interest in acquiring Chico's public, Sycamore has signaled to the market that the company is ripe for bidding. This could attract the attention of an acquirer with more strategic interests (such as a competitor), who may be willing to pay more than Sycamore.

This entire situation gives current shareholders optionality. If the current leadership is able to right the ship, then shareholders will benefit from a turnaround. If the company is pressured into a sale, the stock could be sold for a figure higher than $3.50, but probably not much lower.

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