Shares of 99 Cents Only Stores Inc. jumped Monday after one of the company's biggest shareholders said the business was worth as much as 23% more than a management buyout offer now on the table.
FBR Focus Fund, an Arlington, Va.-based mutual fund that owns 5.5% of the retailer's stock, sent a lengthy letter to 99 Cents Only's board of directors saying that if the company was for sale the board had an obligation to actively shop it around to all potential bidders.
The City of Commerce-based retailer said March 11 that it received a $1.3-billion buyout proposal from the founding Schiffer/Gold family and from L.A. private equity firm Leonard Green & Partners. The offer was worth $19.09 a share.
But the shares immediately surged above that price, signaling that the market believed the bid would have to be raised or that a better offer would surface from another buyer.
The stock traded between $19.45 and $19.80 over the last four weeks as investors waited for more information. On Monday the shares jumped 45 cents, or 2.3%, to $20.25 after FBR released its letter — which was followed several hours later by a statement from 99 Cents Only.
The retailer said that its board had formed a special committee of three independent directors to evaluate management's buyout proposal, and that the committee was "also authorized to consider other proposals and strategic alternatives which may be available to the company."
"The Schiffer/Gold family has assured the company that they will support a full and open process and will consider other bidders arising from such process," the company statement said. The family owns 33% of the retailer's shares.
In its letter, FBR Focus Fund made clear that it didn't want the board to be passive. Directors should "explore the full range of strategic alternatives, including soliciting indications of interest from possible strategic acquirers and other private equity firms," FBR said.
Although the mutual fund had previously said it believed that 99 Cents Only was worth more than $19.09 a share, the letter put some hard numbers on the table.
Citing the retailer's real estate holdings valued at $257 million, FBR said shareholders should be compensated for whatever cash the company might be able to wring from those holdings, such as by refinancing them.
FBR also noted that the board of a rival chain, Family Dollar Stores Inc., last month rejected a $7.7-billion buyout offer from investment firm Trian Group. Family Dollar said the Trian offer "substantially" undervalued its business.
If the price Trian was offering for Family Dollar, relative to the company's earnings, was applied to 99 Cents Only, the latter would be worth as much as $23.50 a share in a takeover, FBR said. That amount is 23% more than the management group and Leonard Green are offering.
FBR said it believed that 99 Cents Only could fetch a price "significantly above" $23.50 a share assuming the board runs an "appropriate" sale process.
Eric Schiffer, the retailer's chief executive, declined to comment on FBR's letter.