BJ's Land a Buyout Lure
By Nicholas Yulico
TheStreet.com Staff Reporter
11/30/2006 7:04 AM EST
Imagine buying a retail stock and getting $750 million of real estate value for free. That's essentially the deal that investors are getting at BJ's Wholesale Club (BJ) -- and it is one reason why buyout firms may be circling. With the recent departure of the company's chief executive, talk of a possible leveraged buyout for BJ's is heating up. Much of the interest has to do with "hidden real estate value," a retailing play made famous by Ed Lampert's successful merger of Kmart and Sears in 2004, which resulted in the giant now known as Sears Holding (SHLD) . BJ's has long been tossed around as a buyout candidate because it has the qualities that private equity loves. The company owns more than a third of its properties, has just $11 million of long-term debt, and should post $300 million of annual earnings before interest, taxes, depreciation and amortization (EBITDA) next year.
Moreover, BJ's real estate alone is worth at least $750 million, according to an estimate calculated by TheStreet.com. The abrupt departure of BJ's CEO Mike Wedge last Wednesday, just 48 hours before Black Friday, was "too odd to ignore," wrote JP Morgan analyst Charles Grom in a research note last week. The stock bounced 10% on the news that Wedge was leaving. The departure "leads us to believe that the company's Board of Directors may be beginning to think strategically, including a potential sale of the company or other recapitalization alternatives, including real estate divestitures," Grom wrote.BJ's stock, currently at around $32, has an enterprise value of $2.1 billion, which is 7.4 times trailing twelve-month EBITDA. Costco (COST) , the largest U.S. wholesale club operator, has a $53 stock that trades at 9.6 times trailing EBITDA. BJ's deserves to trade at some sort of discount to Costco because it has posted slower earnings growth in recent years and faces more challenges as the country's third-largest wholesale club operator. Sam's Club, which is owned by Wal-Mart (WMT) , is the second-largest discount club. However, even if you apply a slight discount to the Costco multiple and add to that a bottoms-up analysis of the real estate, you get a big number for BJ's stock value, says one large investor in the stock who spoke on the condition of anonymity. "This makes for the perfect going-private transaction," the investor says. Another large owner of the stock believes that BJ's is worth at least $38 in an LBO and estimates the real estate is worth about $1 billion.