The comeback kid in retail, Reject Shop Ltd (ASX: TRS), may be the next in the sector to be sold to new owners with the Australian Financial Review reporting that private equity buyers are circling the discount variety chain.
This is despite the fact that the stock has surged close to 40% this calendar year, with the company posting a strong first half profit result in February. This compares to a 2% drop in the All Ordinaries (Index:^AORD) (ASX:XAO) in 2018.
You might think that any potential bidder would not be picking up a bargain, but a takeover of Reject Shop probably delivers better value to a buyer than embattled department store Myer Holdings Ltd (ASX: MYR).
There are no quick solutions to Myer's woes but at least with Reject Shop, the retailer is already in the midst of a recovery. It is also early days yet for Reject Shop, so there is potentially further gains to be had from its turnaround strategy that includes a much better merchandising strategy.
Besides, if you looked at Reject Shop's share price over a one-year period, it is lagging the broader market as it is still down 3% in the red as of yesterday. Hardly an overachiever!
The AFR isn't suggesting a bid is imminent but that several private equity firms are running the ruler over the company.
These potential bidders may also be attracted to Reject Shop's economies of scale and buying power in the fragmented discount variety segment, which is dominated by mum-and-dad run two-dollar shops.
What is perhaps more significant is that Reject Shop has no debt on its balance sheet. The favourite strategy by private equity firms is to takeover an underleveraged company and load it with debt to significantly improve the return on equity in a very short space of time, before flogging the "new" company back to investors through an IPO.
I have predicted a pick-up in corporate activity in the market and retail is as ripe as any sector to see its fair share of transactions with another struggling retailer Specialty Fashion Group Ltd. (ASX: SGH) also under the merger and acquisition (M&A) spotlight.
But any corporate transaction in the retail space will be overshadowed by Wesfarmers Ltd's (ASX: WES) proposed spin-off of the Coles supermarket chain.
I won't be surprised to see Woolworths Group Ltd (ASX: WOW) try to get its underperforming Big W department store asset off its books if the M&A environment proves to be supportive of deal-making.
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