Back in February, BJ’s Wholesale Club (BJ) announced it was exploring and evaluating strategic alternatives, including a possible sale of the company. As is typical, management gave few details regarding potential transactions, did not set a timetable for the process, and said it would not comment further until a course of action was decided upon. The announcement seemed to take the investment community by surprise, since only a month earlier top brass announced a major restructuring plan, which included closing five underperforming clubs and right-sizing headquarters. Still, it has not taken long for the rumor mill on Wall Street to start churning.
As expected, there has been little news out of BJ’s camp since the announcement. There has, however, been much speculation surrounding a possible sale of the wholesaler. In March, Los Angeles-based private equity firm Leonard Green & Partners began looking into purchasing BJ’s and taking it private. Leonard Green reported a 9.5% stake in the wholesaler back in July, 2010, and has been very active on the buyout front of late, taking over both Jo-Ann Stores and J Crew Group. (Some say that Leonard Green’s position may have prompted BJ’s management to consider this route in the first place.) The two parties merely entered into a confidentiality agreement related to a possible buyout, though. While this is a necessary first step in the process, Leonard Green does not even have to make an offer.
In late April, a major newspaper reported that private equity firm Apollo Management submitted a buyout bid valued at more than $3 billion (above $55 a share). The move would make sense, since Apollo already owns the West Coast-based Smart & Final warehouse chain. (BJ’s is primarily based on the East Coast.) The people at Apollo could try to combine the two companies, or simply wring out efficiency and increase purchasing power in an effort to widen relatively thin operating margins. The timing makes sense, too. The confidentiality agreement BJ’s inked with Leonard Green would likely last about a month, since that is about how long it takes to evaluate a company’s operations and prepare a bid. Still, managements at both BJ’s and Apollo have declined to comment on the speculation.
Many on Wall Street have also speculated that companies like Target (TGT) could become involved in the bidding. Investors and analysts cite expansion into fresh foods and recent store overhauls as signs that management at Target is actively looking to markedly increase the top and bottom lines. In addition, it would appear as though a BJ’s/Target marriage could work well, considering major competitor Wal-Mart already operates a chain of warehouse stores under the Sam’s Club name. We think an offer from the likes of Target or a similar company is much more unlikely than a bid from a private equity firm, though stranger things have happened.
Companies that announce intentions to explore and evaluate strategic alternatives are not always sold to the highest bidder, but in BJ’s case we think this will be the end result. Speculators are already having a field day with BJ stock, which has appreciated markedly in recent months. We estimate that BJ shares will fetch between $55 and $60 each, but have seen targets as high as $80. Either way, we think there is room for speculators to make a profit. The risks are high, though. If a deal doesn’t materialize soon, the price of BJ stock would likely fall to the preannouncement level of $43.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.