Skepticism+Activism=Short Squeeze
Over the past couple of year’s BJ’s has been an LBO target on a couple of occasions, often times with a real estate angle leading the rumor mill. On the surface, this time is more of the same.
This morning’s 13D filing by Leonard Green disclosing a 9.5% stake in BJ’s Wholesale Club took us and the market by surprise. It certainly has the shorts scrambling to cover this morning as well, hence the outsized move in a weak tape. Over the past couple of year’s BJ’s has been an LBO target on a couple of occasions, often times with a real estate angle leading the rumor mill. On the surface, this time is more of the same.
The 13D states: “The Reporting Persons acquired the Shares in the belief that the Shares were undervalued. The Reporting Persons intend to contact representatives of the Issuer to engage in a dialogue regarding potential options for enhancing 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 Reporting Persons look forward to working with management of the Issuer in the future.”
A couple of observations:
- Leonard Green has a long history of involvement with retail transactions, almost exclusively via buyout scenarios. Their one recent “trade” occurred with WFMI, which in hindsight appears to have been a home run of a transaction. Interestingly, Leonard Green does have some history with BJ’s, via its predecessor parent, Waban. While no transaction ever occurred, the then CEO, Herb Zarkin, is currently BJ’s non-executive Chairman of the Board.
- While sale-leaseback is listed as a possible outcome of Green’s efforts, it’s important to note that BJ’s owns approximately 30% of its clubs. While still substantial given the geographic locations of the clubs, primarily in the Northeast and Mid-Atlantic, this is not a slam dunk in terms of unleashing value on a one off basis. This is especially true given the inherently thin EBIT margins that may not benefit from turning a real estate asset into a rent liability.
- There is no question that BJ could benefit from an improved merchandising effort (especially on the non-food side of things), but this hardly seems like a task that requires a change in ownership or capital structure. Recall this is a company that is historically very conservative and debt-free. Unless the board and shareholders are in capitulation mode, it seems hard to envision that this glorified supermarket would be interested in “creative financing” options.
- This is likely just the beginning of the “fireworks” between the company and Green. If anything, this will act as a near-term benchmark for other LBO rumors that will have to be vetted. We wouldn’t be surprised to hear more about RSH and SVU in the coming weeks given the market reaction to this filing.
Eric Levine
