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19 Retail Takeovers: Rumors Run Rampant

BJ's Wholesale

There's some skepticism surfacing of a BJ's Wholesale (BJ) buyout, after chatter arose regarding a J.Crew (JCG) takeover by the same private-equity firm supposedly eyeing the wholesaler.

Following reports that J.Crew will be purchased by a private-equity group made up of Leonard Green and TPG Capital, some investors worry Leonard Green will take its focus away from BJ's.

Earlier in the month, it was reported that Leonard Green made a bid for BJ's, and the wholesaler hired Morgan Stanley (MS) to facilitate a potential deal.

Leonard Green holds a 9.5% stake in the company, upping its holding earlier in the year. At the time, Leonard Green said shares of BJ's were undervalued and that it wished to chat with management about ways to enhance shareholder value.

"These discussions may include a 'going-private' transaction, new financings (potentially through mortgage financings or sale leaseback transactions) or other similar transactions," the private equity firm said at the time.

It is estimated that BJ's, which has a market cap of $2.53 billion, could fetch as much as $3 billion in a deal.

Analysts have predicted that the likelihood of a BJ's takeover is high. "In our opinion, BJ's could be a high single-digit square-footage growth story that would command an above market multiple, particularly as it completes its infrastructure upgrade," Janney Capital Markets analyst David Strasser wrote in a note. "Additionally, BJ's has differentiated itself from Costco and Sam's Club by focusing on consumers vs. business customers."

Strasser envisions a scenario where BJ's, as a private company, takes the earnings hit in the near term by entering new markets, and then grows square footage by predominantly filling in these markets, providing a sustainable square-footage story and solid exit strategy.

But Wall Street Strategies analyst Brian Sozzi, who also believed a deal was probable, is now questioning whether or not Leonard Green's big for BJ's ever really happened.

"I am closely watching BJ's Wholesale shares today for the 'tell,'" he wrote in a note.

Strasser argues that Leonard Green's involvement with J.Crew doesn't change the perspecitve on BJ's.

Leonard Green would need an additional $350 million in equity to participate in a J.Crew deal, Strasser estimates, assuming a price of $43.50 a share, 50%/50% debt and equity, and a 25% Leonard Green stake.

Strasser assumes a BJ's deal would be about $52 a share. Since Leonard Green already has a 9.5% stake in the company valued at $265 million, it would need an additional $1.1 billion of equity for a deal.

"Leonard Green's current equity fund is $5.3 billion," Strasser wrote. We don't know how much of this fund has been invested. However, $350 million, in our opinion, is not going to have a meaningful impact on the outcome of the BJ deal."

This isn't the first time takeover chatter has emerged for BJ's. The rumor surfaced back in 2007, following the resignation of its CEO Mike Wedge.
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