Kohl’s Investors, Don’t Leave Money on the Table

The market doesn’t assume a done deal: Kohl’s shares jumped on Monday, though not enough to match the Starboard Value-backed bid price. And that might not be a full price—shares of targets typically trade at a discount even after the parties have agreed.

Kohl’s probably should run a competitive process, given that the Starboard Value offer isn’t overly generous. It puts Kohl’s enterprise value at 3.9 times trailing 12-month earnings before interest, taxes, depreciation and amortization, which would be a lowball offer compared with the six times multiple that Michaels Cos. fetched in a take-private last March, according to a report from Cowen. Put another way, the Starboard Value offer gives Kohl’s an enterprise value of roughly 0.7 times forward revenue, right around its 10-year average. At least nine out of 11 analysts polled by FactSet gave Kohl’s a target price above $64 a share well before news of the Starboard Value-backed bid emerged.

A sale—at the right price—probably makes more sense than any of the other suggestions that activist investors have come up with, including a sale-leaseback and an e-commerce spinoff. Both of those seem designed at extracting short-term value and could have left the remaining shareholders with a company saddled with more leverage (in the case of a sale-leaseback) or just a short-term rise in share price (in the case of e-commerce). Macy’s shares surged after an activist investor suggested an e-commerce spinoff in October, with another boost when it said the following month that it hired a consulting firm to consider the proposal’s merits. It has since come back down to earth.

While activists have tried to point out the flaws in how Kohl’s is run, the department store chain is probably the most promising among a struggling lot, with healthy free cash flow. At last year’s level, it would take Kohl’s less than five years to buy back its equity—a much shorter time frame than the eight and 15 years it would take Macy’s and Nordstrom, respectively. Kohl’s also boasts the best operating margins out of the three.

Chief Executive Michelle Gass has been one of the more innovative leaders in an otherwise moribund industry, adding Amazon returns to its shops and striking a deal in 2020 to place shop-in-shops with popular cosmetic chain Sephora. Kohl’s existing relationship with Amazon.com should put it in pole position should Amazon, which itself is starting to experiment with bricks-and-mortar clothing stores, look to partner up on future experiments.

Whether Kohl’s can get a better bid remains to be seen. Activist investors have suggested in the past that its real estate could be worth $7 billion or more; analysts have pegged that value just $3 billion to $5 billion. In a research report, UBS notes that it doubts Kohl’s real estate has enough value to serve as adequate collateral for the Starboard Value consortium to secure enough financing.

For existing investors in Kohl’s, the takeover approaches should serve as a reminder that the department store chain is still one worth holding on to. Speculators, save for the activist investors that might be thinking about cashing out soon, should probably wait on the sidelines.

Write to Jinjoo Lee at jinjoo.lee@wsj.com