Monday, August 24, 2009

Charlotte Russe to be acquired, certain former shareholders will be outraged (CHIC)

AlphaNinja - Charlotte Russe (CHIC), a mall-based young women's retailer, agreed to be taken private by private Equity firm Advent International Corporation. Management initiated a process to sell the company after being pressured by activist investors, and appears to have been in the right in arguing that previous offers were inadequate. Well done!

The offer price is $17.50 per share, about a 27% premium to Friday's close. Charlotte Russe shares bottomed at $4 back in November, and at this morning's price CHIC shareholders have beaten the S&P500 by 23% over the last two years.

Earnings estimates for 2009 and 2010 have been boosted recently, but still make the company's shares appear expensive, at a 2010 PE of almost 24. Worth noting is the company's sizeable cash balance of $60million, over $2 per share. The company has expanded its store base a little over 10% annually, and with 487 stores they're going to enter the "sweet spot" in terms of store age -->> older established stores will make up a higher % of their total, and these tend to be more profitable on a per-square foot basis. Also a positive is that the bulk of the capital expenditure phase is largely in the rear-view mirror, and big depreciation charges understate earnings.

Earnings peaked in 2007 with net margin of 5% -->>the new owners will leverage lower private market costs, and the talent of former Old Navy president Jenny Ming, to improve upon that. Getting back to 2007 numbers in terms of sales-per-square-foot would get to maybe $30million in free cash flow - more if they slow store expansion and cut costs. There is certainly some great value here for the buyers, as that is a 10% FCFY(Free Cash Flow Yield) if you net out CHIC's cash balance.

From the release:

Under the terms of the merger agreement, an affiliate of Advent will commence a tender offer to purchase for cash all of the outstanding shares of Charlotte Russe common stock, and the associated preferred stock purchase rights, at a price of $17.50 per share, for a total value of approximately $380 million.

John Goodman, Chief Executive Officer of Charlotte Russe, said, “Over the last several quarters, we have worked diligently, increasing our focus on individual store performance metrics, better merchandising and implementing best retail practices to improve operational performance, profitability and shareholder returns. Advent brings in-depth sector knowledge of the rapidly changing retail landscape and an exceptional track record of supporting growth. I am confident that this partnership will create opportunities for our employees and positions us well for the future.”

(Previous) Shareholder KarpReilly had been pushing for change at the company for some time, and had an offer on the table to buy the company outright, at half the current price:

KarpReilly looks to have made some good money on its position, but with the stock now at $17.40, they must be absolutely FUMING that they sold their position in the $12 range, after it was their pestering that lit the fire under management's a$$ to sell the company:

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