Is a Leveraged Buyout in J.C. Penney’s Future?
Speculation that J.C. Penney (NYSE:JCP) may be ready for a leveraged buyout has begun once again. While nothing has been confirmed by the company, shares of J.C. Penney jumped close to 3 percent in early afternoon trading on Tuesday.
The rumors have gained some degree of credence mainly because Bill Ackman, of Pershing Square Capital Management, said that private equity funds expressed interest in the company in the past. The hedge fund, which has 17.87 percent stake in the retailer, wrote in a June 2012 letter to investors that the firm was “approached by one of the most well-respected private equity funds in the world who expressed an interest in acquiring the company at a substantial premium.”
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However he added, “we had no interest in selling the company for a quick premium because we believe in the long-term value creation opportunity.” He based the company’s long-term value in his “complete confidence” in J.C. Penney’s chief executive Ron Johnson.
When Pershing first invested in J.C. Penney in the third quarter of 2010, the company’s stock was valued in the low $30s per share. However by August, Ackman’s investment in J.C. Penney had cost the firm “more than nine percentage points of gross return.” Yet, Ackman did not adjust his position, stating “Very little has changed since that letter other than a continued decline in the share price.”
He wrote, “With time and some changes, the marketing message for the property will be better understood, old customers who left will return, and a large base of new customers, who hadn’t shopped at the property before, will start shopping because they are attracted by the new tenants and the more attractive and compelling shopping experience.”
But since August, the company’s share price has continued to drop. After the retailer’s more recent quarterly earnings report was released on November 9, shares fell below the $20 mark as same-store sales decreased by 26 percent. Now, with the company’s future looking much grimmer than in June, rumors of a leveraged buyout are on the rise.