Cost Plus & Pier 1 Brace For War (PIR, CPWM)

It hasn’t even been a week, and it appears that the proposed acquisition where Pier 1 Imports, Inc. (NYSE: PIR) wants to acquire the operations of Cost Plus Inc. (NASDAQ: CPWM) is going to go rather hostile.

Early this morning, Cost Plus issued a statement saying the company is unanimously rejecting the Pier 1 offer to acquire the company after determining that the offer is not in the best interest of the company and its shareholders.  Its statement pretty much says it all:

• We believe that our strategic plan, which is yielding positive results, will provide Cost Plus shareholders with superior and compelling long-term value as an independent company. Despite your statements to the contrary, Cost Plus has significant liquidity to pursue its business objectives and to deliver improvement in our core business metrics…. Your proposal to combine our operations is not attractive from either a financial or a strategic perspective. It is both distracting and ill-timed given the difficult retail environment and the progress we have made investing in and improving our business.

After today’s close, Pier 1 came out swinging on its own and it doesn’t look like they are going to go away no matter "distracting" this may be.  It even notes its terms and conditions as "subject to only limited conditions that are customary for transactions of this type, which are confirmatory due diligence, the negotiation of a definitive acquisition agreement and the receipt of all necessary shareholder and regulatory approvals."  Unfortunately, when you are engaged in a stock for stock merger where the premium has shrunk to a near take-under those are fairly strong conditions.  Pier 1 plans to take this issue straight to Cost Plus shareholders.

Pier 1 goes further and notes that it could yield roughly $50 million in cost savings and give shareholders the chance for upside in execution.  The original offer would have been valued at $4.00 per share based upon the 0.60 shares of Pier 1 per Cost Plus share.  But with a $5.97 closing price today the offer price at a full swap is only $3.58.  Cost Plus shares closed up at $3.46 today and its 52-week trading range is $3.46 to $9.00.

If Pier 1 wants this company, on the surface it is going to take more money or a larger share offer.  Otherwise many Cost Plus shareholders are going to have to use the worst investment strategy of simply crossing their fingers and hoping things get better, because that exchange ratio isn’t going to get too many holders that excited.

Both stores have their niches, and both have their current problems that overlap.  This merger saga is far from over.

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Jon C. Ogg
June 16, 2008