Pier 1 Imports Offers to Buy Cost Plus

June 8, 2008  by in UnCategorized   

By Home Furnishings Business in Furniture Retailing on June 2008 Pier 1 Imports is on the prowl and looking to acquire one of its primary competitors, Cost Plus.

Pier 1 Imports sent a letter to Cost Plus over the weekend proposing to acquire all outstanding shares of Cost Plus common stock in a stock-for-stock transaction. Pier 1 said a transaction could be completed in the third quarter of this year.

Under the terms of the proposal, Pier 1 Imports Inc. would issue 0.6 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 for each share of Cost Plus common stock.

The offer represents a premium of approximately 31% over the Cost Plus closing price on June 6, 2008, and a premium of approximately 34% over the average closing price of Cost Plus shares for the last 30 trading days.

Cost Plus has 292 stores in 33 states. As of March 1, Pier 1 operated 1,117 stores in the United States and Canada.

“We believe that the combination of Pier 1 Imports and Cost Plus is extremely compelling and would create significant value for the stakeholders of both companies,” said Alex W. Smith, president and chief executive officer. “Given our similar customer bases and broadly similar business models, but distinct market positions, we believe Cost Plus is an excellent fit with Pier 1 Imports. We are confident that combining our two companies would create a stronger and more competitive company that is better positioned for future growth.”

Cost Plus has confirmed it received the bid and called the offer to buy the company as a “non-binding, highly conditional proposal.” The retailer’s board will review and discuss the offer “in due course,” according to a statement released this morning.

Pier 1’s Smith went on to say a merger would result in improvements to Cost Plus’ operating margins and create synergies, including organizational efficiencies in supply chain management, shared services, store operations and other general administrative costs.

“Given our track record of execution and our sound financial condition, we are confident that our management team can deliver long-term growth and profitability to shareholders of the combined company,” Smith said. “We are committed to working together with the Cost Plus Board of Directors to promptly execute a definitive agreement, and look forward to capitalizing on the exciting prospects this combination will create.”

Pier 1’s fourth quarter results released in April showed net income for the quarter of $13.7 million and a $96 million loss for the fiscal year.

In its letter to the Cost Plus board, Pier 1 outlined the benefits it sees to such a merger. They include:

• While Pier 1 has made significant progress since its current management team was augmented in 2007, Cost Plus results have continued to deteriorate through multiple management changes to date. As a result, Cost Plus’ stock price has declined as the company has struggled unsuccessfully to restructure its business, while Pier 1’s stock has retained its value in the face of the same challenging environment. In fact, over the last six months, Pier 1’s stock price has appreciated 64.7 percent, while Cost Plus’ stock price has declined 13.1 percent;

• Absent a transaction, Cost Plus is likely to face increasing liquidity problems. Pier 1’s financial condition is sound and it has a committed $450 million asset-based lending facility that should be sufficient to provide future operational liquidity for both companies. Pier 1 is confident that Cost Plus’s shareholders would prefer a combined company focused on long-term growth and profitability rather than a stand-alone Cost Plus preoccupied with simply reaching positive cash flow;

• Over the last year, Pier 1 management has achieved about $160 million in cost savings as a result of efforts to reduce marketing expenses, payroll and other general administrative costs. Based on publicly-available information, and Pier 1’s expectation of the combined benefits of a Pier 1-Cost Plus transaction, Pier 1 believes that it can achieve cost savings in the range of 5 percent of sales of Cost Plus (approximately $50 million), which is consistent with comparable retail transactions. Pier 1’s management is confident that the combination would result in improvements in Cost Plus’ operating margins, providing an opportunity for Cost Plus shareholders not only to participate in the turnaround of Cost Plus’ business, but also to reap the benefits of a larger, more efficient company that has the potential to once again achieve our companies’ historically high operating margins, and

• Pier 1’s management team is well equipped to implement a speedy turnaround at Cost Plus. Pier 1’s senior management has experience operating multi-divisional companies, both at Pier 1 and externally, and can leverage our current systems to effect a smooth and efficient integration of our businesses.

The proposal is subject to due diligence, which Pier 1 said it is prepared to begin immediately, negotiation of a definitive acquisition agreement and shareholder and regulatory approval.

Pier 1 also said it is ready to deliver a draft merger agreement to Cost Plus and begin discussions immediately.