Simon, Brookfield Using 'Different Playbook' In Attempt To Buy Kohl's

Two of the largest mall owners in the U.S. are again looking to take over a retail brand, but one of a very different kind from their previous acquisitions.

Simon Property Group and Brookfield Asset Management have made an offer to purchase department store chain Kohl's in a deal that would value the company at $8.6B, the New York Post reports. The pair's offer of $68 per share is well above the $60 price at which Kohl's was trading in the aftermath of the acquisition offer going public, but nearly in line with what private equity firm Sycamore Partners and Canadian retail institution Hudson's Bay reportedly offered in March.

Should Simon and Brookfield succeed in purchasing Kohl's, it would spell the end for the chain's initiative to place Sephora mini-stores within hundreds of its locations, the Post reports. No public indication has been given regarding the fate of Kohl's planned foray into smaller-format stores, which were announced during the company's Q4 earnings call.

Simon and Brookfield, which already own JCPenney after buying the brand out of bankruptcy in December 2020, project savings of over $1B within three years by combining the tech platforms, supply chains and private label apparel of the 118-year-old department store chain and Kohl's, the Post reports. That projected synergy makes an acquisition of Kohl's little more than a mild surprise, but it's still a significant departure from the pair's previous behavior, said BMO Capital Markets Managing Director Juan Sanabria, who serves as the investment bank's research analyst for Simon.

“It’s definitely interesting, because the first wave of these investments was buying out of bankruptcy or weakness, and this appears to be a different playbook," Sanabria told Bisnow.

Kohl's is not in imminent financial distress, although activist minority investors Macellum Capital Management and Engine Capital precipitated the current bidding war for Kohl's by pushing the company to monetize its real estate. Kohl's owns a large majority of its 1,162 stores, which Macellum and Engine contend could generate significant revenue through sale-leaseback deals.

JCPenney also owned a significant portion of its properties before filing for Chapter 11, but Simon and Brookfield purchased only the company responsible for the brand's operations as part of its bankruptcy restructuring. If the companies' combined bid for Kohl's is successful, it may very well spin off the real estate portion as a separate company to help pay for the acquisition, Sanabria said.

Even though JCPenney's real estate structure reduced its exposure on Simon and Brookfield's tenant portfolios, its anchor status at the landlords' malls left them vulnerable to inline tenants triggering release clauses in their leases if the department store went dark. That made the investment at least partially a defensive one, but the same logic would not apply to Kohl's, which operates mainly on standalone sites and outparcels of regional and power shopping centers.

"They’re going after a retailer with a different strategic philosophy on where they want to be physically,” Sanabria said. “From Simon’s perspective, it could be seen as a hedge against the trends of consumers getting out of indoor malls and into neighborhoods.” 

Simon, despite reporting sales in line with 2019 levels and record cash flow in its most recent quarterly report, has surrendered several mall properties to lenders since the pandemic's onset and owns several more with grim finances. Until it became involved with Kohl's, Simon's acquisition of retail brands like JCPenney had been in line with its stated strategy of improving the performance of stores within its malls, though investors have yet to see proof that it is paying off, Sanabria said.

“While the Simon shareholders recognize the upside in the retail investments they’ve had at a low basis, there needs to be better disclosure to better understand how these businesses and investments are performing," he said. "They’re just more volatile revenue streams than real estate, and have a lower multiple than real estate.”

In addition to facilitating the integration of JCPenney and Kohl's, Brookfield's involvement in the transaction may be part of its strategy to finance the expansion of its asset management business through real estate sales. Spinning off Kohl's real estate or selling individual properties would advance that strategy, as would increasing Brookfield's exposure to the equities market.