Private equity firm to purchase Michaels for a whopping $5 billion
Apollo Global Management, a leading private equity firm, has agreed to acquire craft retailer Michaels for $5 billion. The deal, which is expected to close in the first half of Michaels' fiscal year, will see the company transition into private equity ownership.
The deal is financed through a combination of equity from Apollo-managed funds and debt financing. Credit Suisse, Barclays, Wells Fargo, RBC Capital Markets, Deutsche Bank, Mizuho, and Bank of America will provide the debt financing.
The acquisition presents both potential benefits and risks for Michaels. On the one hand, private equity firms like Apollo often bring strategic expertise and resources that can help Michaels expand its operations in both physical craft stores and e-commerce. This expertise can optimize supply chains, improve logistical efficiencies, and enhance digital capabilities.
Additionally, Apollo could provide Michaels with access to additional capital, allowing the company to invest in growth initiatives, consolidate debt, or pursue new market opportunities. Operational efficiency is another potential benefit, with private equity ownership often involving restructuring and streamlining operations to make them more efficient and profitable.
However, there are also potential risks associated with private equity ownership. One of the main concerns is the debt burden that private equity firms frequently impose. This increased debt might limit Michaels' ability to invest in new initiatives or respond to market changes.
Changes in management and strategy are another potential risk. Private equity ownership can lead to changes in management or strategic direction, potentially disrupting Michaels' existing business model or sacrificing long-term growth for short-term gains. The focus on short-term returns is another concern, as private equity firms typically aim to generate returns over a specific horizon, which might lead to decisions prioritizing short-term profitability over long-term strategic growth or sustainability.
Neil Saunders, GlobalData Managing Director, warns that the Michaels-Apollo deal's long-term debt may interfere with the retailer's ability to invest and compete during a time of stiff competition. He also predicts that the crafting market will remain elevated compared to pre-pandemic levels, providing opportunities for Michaels to grow its top line.
Michaels has made recent investments in its online proposition, including services like curbside collection and same-day delivery. The pandemic has ignited sales for craft stores like Michaels and Joann, and Michaels has enjoyed strong demand in non-crafting categories like jigsaw puzzles and toys.
If a better offer is received, Michaels has the right to terminate the agreement. The transaction values Michaels at approximately $3.3 billion. Apollo Global Management's acquisition of Michaels is expected to benefit from improvements in e-commerce and bulking pricing, making the craft retailer more competitive with Amazon and other rivals.
However, Apollo Global Management will need a strategy to boost revenue, not just cut costs, in order to make Michaels work on both the top and bottom lines. Michaels' board has unanimously approved the deal.
Last month, Joann filed a proposed $100 million initial public offering to maintain its private equity owner's majority stake. The Michaels-Apollo deal may face challenges due to the premium paid for Michaels, as the retail sector is dynamic and requires a strategic approach to success.
Apollo has shown interest in strategic investments, such as acquiring Stream Data Centers, indicating a willingness to support growth in critical sectors. This strategic acumen could be beneficial for Michaels, should Apollo become involved. The firm's ability to manage significant assets and undertake large financial transactions suggests it could provide substantial financial support to Michaels.
Without direct information on Apollo's involvement with Michaels, these points provide a general framework for understanding potential implications of private equity ownership. Saunders believes that the online investments Michaels has made will pay dividends well into the future. The pandemic has forced Michaels to innovate online, and these investments could provide a competitive edge in the post-pandemic world.
Michaels has 25 days to consider other offers.
- Apollo Global Management, a well-known private equity firm, has agreed to finance the acquisition of Michaels, a craft retailer, through a combination of equity from Apollo-managed funds and debt financing provided by various financial institutions.
- Private equity firms like Apollo can bring strategic expertise and resources that can potentially help Michaels expand its operations, optimize supply chains, improve logistical efficiencies, and enhance digital capabilities.
- However, the increased debt burden that private equity firms often impose could limit Michaels' ability to invest in new initiatives or respond to market changes.
- Changes in management and strategic direction, and a focus on short-term returns, are other potential risks associated with private equity ownership, which might disrupt Michaels' existing business model or sacrifice long-term growth for short-term gains.
