Pier 1 Offers $81M for Cost Plus

OAKLAND, CA-You’re drowning; let us throw you a life jacket. That’s essentially the letter Fort Worth, TX-based retailer Pier One Imports sent to the smaller, locally based Cost Plus World Market chain on Friday, offering to acquire the retailer in a stock-for-stock transaction it would like to close in the third quarter. Cost Plus operates 299 stores. Pier One operates 1,117 stores.

Pier 1 Imports offered to issue 0.6 of its share for every share of Cost Plus, which implies a price of $4 per share or approximately $81 million. The offer is 31% higher than Cost Plus’ closing share price on Friday and 34% higher than the company’s 30-day average share price. Share of Cost Plus, which closed at $3.05 on Friday, opened at $3.77 on Monday and in noontime trading stood at $3.58, up more than 17% on the day. Pier 1 Shares opened at $6.50 and was down to $6.00 in noontime trading, off approximately 10%.

Asking to meet with Cost Plus executives today, Pier One president/chief executive Alex Smith states in the letter that the combination will result in improvements in Cost Plus’s operating margins through organizational efficiencies in the supply chain management, shared services, store operations and other general administrative costs. Smith suggests that it can achieve costs savings for Cost Plus in the range of 5% of sales (approximately $50 million). In addition, he says Cost Plus shareholders, who would need to approve the transaction, would enjoy improved operational liquidity and a more active trading market for their shares.

“We are prepared to deliver a draft merger agreement to you and begin discussions immediately,” states Smith in a letter to Cost Plus’ Board of Directors. “We have engaged JPMorgan as our financial advisor for this purpose, as well as outside legal counsel. Our team is prepared to devote the additional significant resources necessary to ensure a smooth and expedited process.”

But that’s at the end of the letter. The beginning of the letter details Cost Plus’ problems, from its “multiple management changes” to its “unsuccessful” restructuring to its “precipitously” declining stock price, and how that stands in stark contrast to Pier One’s performance. “In fact, over the last six months, Pier 1′s stock price has appreciated 64.7%, while Cost Plus’s stock price has declined 13.1%,” states Smith in the letter.

Absent a transaction, Smith says Cost Plus is “likely to face increasing liquidity problems” while “Pier 1′s financial condition is sound.” Indeed, he says Pier One committed a $450-million asset-based lending facility that should be sufficient to provide future operational liquidity for both companies.

“We are confident that Cost Plus 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,” Smith says. “Our preference is to work together with you and your advisors to negotiate and announce a definitive agreement between our companies in the near term. Our antitrust counsel has advised us that the antitrust review process should be straightforward.”

That having been said, Pier One also offered a warning. “We note that Cost Plus currently has in place a shareholder rights plan (or poison pill) that is scheduled to expire on June 30, 2008,” Smith states. “As a shareholder of Cost Plus, please consider this our formal request that you terminate that shareholder rights plan immediately and that you refrain from renewing or extending it or adopting any other rights plan or poison pill. In addition to your fiduciary duty to shareholders, who should have the right to decide for themselves whether a transaction is in their best interests as owners of Cost Plus, we believe that the Cost Plus shareholder rights plan is a discriminatory rights plan that violates Section 203 of the California Corporations Code.”