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Friday, July 14, 2006

Speculating on BJ’s Future

By William Trent, CFA of Stock Market Beat

When we saw this article on Watch List company BJ’s Wholesale (BJ) and the possibility of it being acquired, it got us to thinking. Specifically, it got us thinking about whether there might be a fit with Eddie Lampert’s Sears Holdings (SHLD).

For one, BJ’s stock is cheap and getting cheaper, trading at around five times its cash flow. That’s especially compelling to private equity firms routinely shelling out more than eight times cash flow for retail assets — and taking some heat lately for overpaying.

BJ’s has virtually no debt and owns about 40 percent of its real estate, both seen as positives to potential buyers.

“BJ’s is concentrated in the Northeast in good markets,” said an investment banker who did not want to be named. “There is $800 million to $900 million in real estate value in this company alone.”

It sends us back to the days when pundits were speculating that Lampert’s buyouts of Sears and K-Mart were all about the real estate. Boy were those pundits fooled when Eddie turned out to have an affinity for merchandising. Still, he may just be playing his cards close to his vest while waiting to put the last piece into the puzzle.

Could BJ’s be that piece? They are having trouble right now:

If you’re looking to harness cash flow and lever it up a bit, BJ’s could be a very good investment for someone,” said Patricia Edwards, managing director and retail analyst at investment firm Wentworth, Hauser & Violich. “It’s not a bad business, it’s just a tough business.”

BJ’s, based in Natick, Massachusetts is concentrated in the pricey U.S. Northeast. Its estimated 2007 earnings before interest, taxes, depreciation and amortization - a cash flow measure - is $333.49 million, according to Reuters Estimates.But the company is in the unenviable position of competing against two of the toughest players in the retail discounting sector — Wal-Mart Stores Inc.’s (WMT) Sam’s Club and Costco Wholesale Corp. (COST). BJ’s is the largest player in the Northeast, but it is only a matter of time before Costco and Wal-Mart, both hungry for expansion, move in with full force.

By buying BJ’s, Sears could fight Wal-Mart’s fire with fire - having its own discount/wholesale one-two punch.

Will it happen? We doubt it. All this is speculation - both the article and our own extension to SHLD. But it’s fun to speculate about mergers and acquisitions, and we didn’t want Reuters to have all the fun.

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