Musings on yet another strange industry deal

Conn’s acquisition of W.S. Badcock has industry observers scratching their heads

Does anybody other than me hear The Grateful Dead’s version of “Trucking” playing at full volume in their head?

For me, the song keeps getting stuck on the line that observes, “What a long, strange trip it’s been.”

As someone still trying to find the logic in the recent management shuffle at Norwalk Furniture, the recent announcement by Conn’s confirming a deal where W.S. Badcock becomes a wholly owned subsidiary of the company has my head spinning.

When I saw the breaking news here at Home News Now, I admit to having read the news item more than once. 

While I understand that consolidation impacts every industry, my first reaction, nonetheless, was that this deal may make even less sense than the Norwalk management reshuffle.  

Based on the performances of each company, I don’t think it would be unfair to say that each retailer has had a somewhat uphill battle in terms of performance and profitability.

Assuming my observation about both retailers is fair, I am struggling to see how bringing two challenged retailers together necessarily makes each one stronger.

In the spirit of “fair and balanced,” I am listing the key points that Conn’s listed in its announcement of the deal.

The company believes the deal will:

· Accelerate growth opportunities by combining two complementary businesses with similar product categories, payment solutions and customer profiles 

· Combine Conn’s in-house credit platform and expertise with Badcock’s existing financing capabilities 

· Increase scale and expand Conn’s presence across the southeastern U.S., creating one of the largest home goods retailers with 550+ stores across 15 states and approximately $1.85 billion in revenue 

· Strengthen financial profile with over $50 million of expected cost synergies on a run-rate basis in 18 months, enhance Conn’s balance sheet by bringing approximately $125 million of incremental liquidity with the addition of Badcock collateral, and extend debt maturities by three years.

That sounds and looks great on paper, but in talking to some of my sources, many of them feel these two retailers have very different logistics models, different business models and different styles of doing business. 

While acknowledging that both retailers have customers that need credit and are each in the furniture, mattress and appliance business, another of my sources went on to point out that furniture and mattresses make up significantly more of Badcock’s sales than Conn’s.

Others also pointed out that Conn’s owns its inventory and some 75% of Badcock’s stores are owned by Badcock dealers.

But like the other sources I spoke with, he stressed that the real question being discussed by the industry is what the real end game of this deal may be.

Another observer, also very plugged in, said after looking at the numbers, the math, in his opinion, just didn’t add up.

Claiming that the current stock value was under $90 million right now for the combined company and when that number was put up against Conn’s and Badcock’s combined 550 stores, that equates to less than $200,000 a store.

He wondered if someone close to the companies involved might not be patiently waiting in the wings to buy Conn’s at fire-sale prices — my source tossed out a sale price of $100 million — then dissolve Badcock.  

But here’s another interesting tidbit. Insiders aren’t the only ones trying to make sense of the deal.

Halper Sadeh LLC, an investor-rights law firm, is investigating whether the merger of Conn’s Inc. and W.S. Badcock LLC is fair to Conn’s shareholders.

According to the firm, the investigation concerns whether Conn’s and its board may have violated the federal securities laws and/or breached their fiduciary duties to shareholders by failing to, among other things: (1) obtain the best possible consideration for Conn’s shareholders, and (2) disclose all material information necessary for Conn’s shareholders to adequately assess and value the merger consideration. 

On behalf of Conn’s shareholders, Halper Sadeh LLC may seek increased consideration for shareholders, additional disclosures and information concerning the proposed transaction, or other relief. 

At least for the time being, while it seems lots of people are straining their necks to peek around the corner, I find myself sitting here in a semi-deja-vu state recalling how the stories ended for Heilig-Meyers and Furniture Brands.

Stay tuned. I don’t think this story is over yet. 

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