Bradlees' Rebound Has Some Thinking It's Ripe for a Sale

Some observers think the Northeast discount retailer is bound to be bought by acquisitive rivals.
Author:
Publish date:

With a turnaround under way,

Bradlees

(BRAD)

, the discount chain that emerged from bankruptcy protection last February, is planning to sell its story to Wall Street analysts during a meeting Tuesday at New York's

Omni Berkshire

hotel.

In the end, it could be the entire company that's for sale, say an analyst and two other people familiar with Bradlees who asked not to be named.

Ames Department Stores

(AMES)

has already approached Bradlees regarding a merger, say these two people. Bradlees rebuffed the overture. And on Nov. 24, the Braintree, Mass., company adopted a shareholder rights plan, better known as a poison pill. Such plans can be used to deter unwanted suitors by permitting the company to issue huge amounts of shares that make it expensive for an acquirer to amass a substantial stake. In other cases, they can prevent acquirers from low-balling a bid when management considers the stock undervalued.

"We don't comment on rumors," says Rolando De Aguiar, Ames' chief financial officer.

Bradlees spokesman Fred McGrail declines to say whether Ames, or any other potential suitor, was behind the company's poison pill plan. "Our focus is on running this company," as opposed to selling it, he adds.

So far, that approach is working. For the nine months ended Oct. 30, sales at stores open at least a year jumped a healthy 14.2%. Reversing years of losses, Bradlees should be in the black for the fiscal year ending in January 2001, with a profit of 16 cents per share, according to

First Call/Thomson Financial

.

Yet there are several reasons a takeout may be inevitable. A shakeout in the early '90s eliminated most of the independent discount chains in the Northeast, except for Bradlees and

Ames Department Stores

(AMES)

.

That places Bradlees in a position of vulnerability and strength at the same time. As a standalone entity, Bradlees is at risk as stronger players like

Wal-Mart

(WMT) - Get Report

and

Dayton Hudson's

(DH)

Target

division bombard the Northeast. Yet, with its 104 stores, many in urban areas, Bradlees owns some of the hottest real estate in the region.

Buy or Build

"If you want coverage in the Northeast, you can do it the hard way and build stores," says Eric Beder, an analyst with

Ladenburg Thalmann

. "Or you can buy Bradlees." (Beder rates Bradlees a buy and his firm hasn't provided underwriting for the company.) His 12-month target on the stock, regardless of any takeover, is 12. The stock closed Monday at 8 3/4, off 3/32.

Companies such as

Kohl's

(KSS) - Get Report

, Wal-Mart, Target and Ames have all shown that they're willing to pay a premium to increase their footing in the region. (Wal-Mart didn't return a call seeking comment. Kohl's says it has no immediate plans to add more stores in the region. Target declines to comment.)

For instance, Bradlees paid just $600,000 apiece for two

Caldor

locations when the company dissolved in bankruptcy earlier this year. Those stores will generate roughly $20 million each in sales this year. That's well above Bradlees' average of $14 million per store. By comparison, Wal-Mart paid more than $6 million each for 12 Caldor locations. On average, each of the 72 Caldor stores fetched $4.5 million, according to Beder's estimates.

Valuing Bradlees stores in a similar fashion, Beder comes up with a $398.3 million price tag, or $17.54 a share. He arrives at a higher valuation of $24.60 per share if he uses Ames' purchase of

Hills Department Stores

, completed last March, as a guide.

Taking Ames

Industry observers say a Ames-Bradlees combination makes sense. "Ames and Bradlees have a similar customer base, and there's not that much overlap in their store locations," says Jim Rice, vice president with

Bernard Sands

, a credit agency that specializes in retailing. Furthermore, Ames has integrated the 155-store Hills purchase, one that doubled the company's size, flawlessly.

It's unclear why Bradlees rejected Ames overtures. A long-running rivalry between the chief executives of the two companies may have played a role. Peter Thorner was CEO of Ames until he left in 1996 to fill that spot at Bradlees. He passed the mantle at Ames to Joseph Ettore, who largely gets credit for that company's turnaround -- for which Thorner laid the foundation.

This isn't the first time there's been talk of a Bradlees merger. During the company's bankruptcy proceedings, which lasted from June '96 to February '99, Bradlees-Caldor was a frequently mentioned combination that never materialized. Thorner figured he had a better chance of marshaling Bradlees through Chapter 11 proceedings without Caldor's prohibitive debt load.

Should the right partner present itself, Thorner would be more than happy to cut a deal, says Beder, the analyst. "Peter isn't here to make his little fiefdom," he says. "He is more than ready to create value."

There's one way to do that, he says: "The endgame here is that someone buys this company."