Why Shares of Rent-A-Center Slumped Today

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What happened

Shares of Rent-A-Center (NASDAQ: RCII) declined on Tuesday after the rent-to-own retailer announced that it was terminating its merger agreement with Vintage Capital. Rent-A-Center struck a deal in June to be acquired for $15 per share, but the company did not receive an extension notice from Vintage Capital by the Dec. 17 deadline. The stock was down about 13.9% at 11:40 a.m. EST.

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So what

The agreement between Rent-A-Center and Vintage Capital allowed either party to provide notice to the other of its election to extend the end date an additional three months to March 17, 2019. A second request for information from the Federal Trade Commission regarding the transaction made closing the deal by the original end date infeasible.

The FTC is concerned about competition. From its website's explanation of merger review: "If the initial review has raised competition issues, the agency may extend the review and ask the parties to turn over more information so it can take a closer look at how the transaction will affect competition (this action often is referred to as a "second request.")." Vintage Capital is a controlling shareholder in rent-to-own retailer Buddy's Home Furnishings.

Rent-A-Center decided against exercising its right to extend the end date "in light of the current financial and operational performance of the Company." Vintage Capital will be required to pay Rent-A-Center a reverse breakup free of $126.5 million within three business days.

Now what

Rent-A-Center will hold a conference call to discuss its 2019 financial forecast on the morning of Dec. 20. Rent-A-Center's third-quarter results, reported on Nov. 5, were generally positive. Same-store sales rose 5.7%, and both revenue and adjusted earnings came in above analyst expectations. Revenue grew on a year-over-year basis for the first time since late 2015.

With Rent-A-Center's results improving in the third quarter, the company may no longer believe that being acquired is the best course of action.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.