Today, Dollarama (Canadian value retailer) has offered to acquire The Reject Shop at 6.68 $ / share, which represents a premium of 112 % compared to its last price.
Really interesting to see a TOB in the retail sector. Quite scarce, while we are more hearing about bankruptcies in this sector.
This one may be explained by several elements together : a clear recovery based on last half year results, low average prices and very good financial situation. As well as a valuation which looked also really low (PE, free cash flow yield).
Such a high premium for this bid is a good reminder that several small cap retailers are really cheap. However, the lack of interest for small caps (and often a poor liquidity) explain such low valuations for these retailers. So, it remains tough to buy these stocks as they can remain cheap for a long time, if there is no bid for them.
Could we see other TOB in the sector ? There are a lot of listed retailers which have a high level of free cash flow, which may be interesting for private equities or large retail groups. However, at this stage, difficult to say if we are at the start of a new consolidation phase for the retail sector.
Potential targets may be companies which have a similar profile to The Reject Shop : recovery, high free cash flow yield.
