Pier One & Cost Plus Merger; 1 + 1 = 1 (PIR, CPWM)

Pier One Inc. (NYSE: PIR) saw shares tumble today on what some may think as a game changing deal where it offered to acquire rival Cost Plus Inc. (NASDAQ: CPWM), the parent of its direct competing store Cost Plus World markets.

As far as the terms before any dilution, this would have been a 31% premium for Cost Plus before any dilution metrics come into play.  The buyout terms are for 0.6 shares of Pier One for each share of Cost Plus.   

The problem is that Pier One shares have fallen and therefore lowered the potential buyout price compared to any cash offer buyout deal. With a 16% drop to $5.55 per Pier One share, this works out to a mere $3.33 for Cost Plus.

The truth is that a deal of this sort would perhaps allow the company to stabilize the bleeding of the two operations.  Both suffer from many of the same commonalities:

1. weak consumer
2. brutal housing markets
3. weak dollar and dependence on foreign suppliers
4. poor execution and inability to compete
5. lack of pricing power
6. lack of profitability and inconsistent turnarounds

The problem is that while Cost Plus is up on the offer, this is just a stock for stock swap and requires the faithless to take faith into another group that also its legion of faithless behind it.  Pier One did note that Cost Plus was going to soon run into liquidity issues if it does not agree to to a deal.  Unfortunately, that is correct if its books are accurate.

Lastly, this would have made great sense in 2006 before Cost Plus pared down some of its real estate ownership for a sale-leaseback arrangement.  Cost Plus shares are now only up about 7% at $3.28; its 52-week trading range is $2.65 to $9.02.

We have reviewed both Cost Plus and Pier One for our weekly "10 Stocks Under $10" newsletter.  Unfortunately, for now it appears that this merger is the mathematical equivalent of "1+1=1"… or so it seems.

Jon C. Ogg
June 9, 2008