Pier 1 Makes Run At Cost Plus
June 13th 2008 00:58
Pier 1 Imports (PIR) offers to acquire Cost Plus (CPWM) for $88.4 Million.
Under the terms of the proposal, Pier 1 Imports, Inc. would issue 0.6000 shares of its common stock for each share of Cost Plus common stock. Based on the closing prices of Pier 1 Imports and Cost Plus on June 6, 2008, the proposed exchange ratio implies a value of $4.00 for each share of Cost Plus common stock
Wedbush Morgan notes "Pier 1 believes that it can "achieve significant cost savings of roughly $50 million" with the help of Cost Plus..."
If that is true, PIR could acquire $1 Billion in revenues for $38 Million. For PIR, using stock to purchase CPWM, looks great on paper. PIR, with $1.5 Billion in revenues is trading at 1.78 times book value and has a price to sales ratio of .32, while CPWM was trading at .34 of book value with a .07 price to sales ratio. Clearly, PIR is using comparetively high priced stock to acquire very low priced stock.
Some don't like the deal. Lisa LaMotta at Forbes in a story entitled Pier 1 Cost Plus = Trouble writes
Analysts speculate that Pier I investors are unhappy ( MY NOTE: because the stock fell 21.1%!) the company is taking on more distractions amidst a down housing market that has affected sales across the retail sector, particularly in home-related items. Investors could also be peeved that Pier I is taking resources away from the turn-around promised by chief executive Alex Smith when he took over at the start of 2007.
Let me tell you, the stock of the acquirer almost always goes down because there will be more shares outstanding which is generally dilutive. The acquiree almost always goes up.
If I were a shareholder, I would say bravo! PIR will almost double revenues for $38 Million! There will be no upfront debt increase. It is a similar business, so no huge learning curve. Most of all it's in an industry that is flat on its back; on the stretcher. That's not a circumstance that will last forever. The market will turn and PIR will have purchased a company for a song.
I used to tell clients in the late 80s, when banks were trading at 25% of tangible book value, "It's like buying $20 bills for $5. Who can pass that up?"
UPDATE: When I wrote the article I checked the stats for PIR and CPWM at keystats on Yahoo. Their website went down and I wrote the book value and PSR from memory. With the site back up this morning, I reviewed the numbers. I was close,but they are accurate now.
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