Michaels and a private equity firm Apollo Global Management announced on Wednesday that it has entered into a definitive merger agreement, in which the Apollo subsidiaries have agreed to acquire the craft retailer for $ 5 billion, in a deal that values Michaels at around $ 3.3 billion.
The deal will be funded by a combination of equity from funds managed by Apollo and debt financing provided by Credit Suisse, Barclays, Wells Fargo, RBC Capital Markets, Deutsche Bank, Mizuho and Bank of America, according to a statement. Press.
Michaels’ board of directors unanimously approved the deal, which is expected to be finalized in the first half of its fiscal year. The retailer has 25 days to “solicit, evaluate and possibly enter into negotiations with” other suitors, and has the right to terminate the agreement if there is a better offer.
The pandemic has been nasty to retail in general, but has sparked sales at craft stores like Michaels and Jeanne. Michaels also enjoyed strong demand in non-craft categories like puzzles and toys, according to GlobalData Managing Director Neil Saunders.
The success sparked investor interest and boosted activity. Last month, for example, Joann submitted a proposal Initial public offering of $ 100 million which would maintain the majority stake of its private equity owner.
Now it’s Michaels’ turn. Its future owners are poised to benefit not only from the craze for craftsmanship, but also from e-commerce improvements and wholesale pricing that have made it more competitive with Amazon and other rivals, Saunders said in comments sent by email.
“Although demand may decline a bit in 2021, the craft market will remain high compared to what it was before the pandemic,” he said. “And, as such, Michaels’ new owners, Apollo, will benefit as they seek to grow the company’s bottom line. Apollo will also benefit from Michaels’ recent investments in its online proposition, including services like curbside pickup and same-day delivery. Arguably, having a strong e-commerce and multi-channel operation should have been at stake years ago. However, the pandemic has forced Michaels’ hand and we believe his inventiveness and online investments will pay off in the future. “
The proposed debt, which is common in buyouts by private equity firms like Apollo, casts a shadow, however. High levels of debt and high management fees in connection with private ownership have interfered with the turnover of several retailers, leading many to bankruptcy to research. The long-term debt of the Michaels-Apollo deal will be “require an uncomfortable level of interest payments, “at a time when competition is stiff and stores require investment,” Saunders warned.
“Apollo will have plans, but given the premium they paid for Michaels, it is essential that they make the business run on both bottom line and bottom line,” he said. “Given the dynamics of the industry, this cannot be just a financial game. There has to be a strategy to increase revenues and not just to reduce costs.”