Novice Investing - Paying Dearly For Michael

Date: Monday 01st 2008f December 2008 03:58:39 PM

Paying Dearly For Michael - 07/02/2006

By: Novice Investing Staff

It is finally official. Michael Stores Inc. (MIK) has reached a deal to sell itself for $ 6 Billion to two private equity groups. Back in March, we feel that a price of above $ 5 Billion is way too steep for buyers. Let us analyze it further if it remains true today. We will analyze it quantitatively simply by looking at Michael's balance sheet and competitors. What do buyers get at Michael? Michael holds a $ 441 Million in cash on its latest balance sheet (April 29th 2006). Therefore, the true purchase of Michael is $ 5.59 Billion. In return, buyers will get 897 Michael stores, 165 Aaron brothers stores, 11 recollection stores and 4 star Decorators Wholesale stores. Converting into the same type of stores, we estimate that the company has 1122 Michael stores.

On march, we argued that buyers can get a better deal buying Michael's competitors. Let's look at Jo-Ann Stores Inc.(JAS), AC Moore Arts (ACMR) and Hancock Fabrics Inc. (HKF).

-- Jo-Ann Stores: 838 stores, market capitalization: $ 353.07 Million, $265.6 M net debt. Real price is therefore $ 618.67 Million.

-- AC Moore Arts: 109 stores, market capitalization: $ 323.87 Million, $ 33.7 M net cash. Real price: $ 290.17 Million.

-- Hancock Fabrics: 446 stores, market capitalization: $ 63.93 Million, $ 59.7 M net debt. Real price: $ 123.63 Million.

From here, we can deduce that buyers can buy Michael's competitors at a combined price of $ 1.032 Billion and they will get 1393 stores. Granted, not all stores are equal. Meanwhile, Michael currently owns a much more 1122 profitable stores but with a steep price of $ 5.59 Billion.

However, with 1/5 of the price, you can own as much as store counts as Michael's profitable stores. Even if you assume $ 2 Billion to close underperforming stores and opening a better-located stores, you still save yourself $ 2.59 Billion. What can Michael do that you can't? The best

inventory management technology at Walmart, can be had for a lot less than $ 1 Billion a piece if the retailer behemoth decides to go that route. How about a better selection of goods at Michael's stores? You cannot imitate that? Hello. We can all go to Michael's stores, jot down what it sells and get the suppliers online. They will be happy to supply both you and Michael's, competing for the similar kind of customers.

Or perhaps, Michael has a pretty savvy store merchandising teams that can entice customers whenever they enter the stores. Well, you still have $ 1.59 Billion left on our last count. Can you not hire Michael's best talent for less? Sure, you do. They would probably join your team with less than $ 100 Million a year.

In this era of commoditization, you can do what your competitors do, assuming that you have the necessary resources. Right now, we are assuming that if you can buy Michael's Stores for $ 5.59 Billion, you can then buy Michael's combined competitors for a lot less and some money to spend.

We are still scratching our head and digest the reasons of taking over Michael. Perhaps, it is something that we cannot see from the outer circle. After all, what we did was merely doing some quantitative analysis instead of qualitative ones. The characteristic of private equity firm is to buy company on the cheap, mend it, achieve some cost saving and then sell it back. Well, you can do that a lot cheaper to Michael's competitors by the reasoning outline above.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Michael Stores Inc. (MIK) or any other securities.

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