Rent-A-Center Rallies as Breakup Fee for Scuttled Deal Stays Up in the Air

(Bloomberg) -- Rent-A-Center Inc. will stay public after a Delaware Chancery judge ruled Thursday it doesn’t have to complete a $1.37 billion buyout by Vintage Capital Management LLC. The judge found the home-furnishings retailer properly canceled the deal on a technicality.

But Judge Sam Glasscock III has yet to find who is entitled to a $126.5 million breakup fee. If Rent-A-Center prevails, that may add to Street valuations and earnings.

But don’t count on Vintage and B. Riley Financial Inc., which backed Vintage’s bid, being able to cough up the cash, Loop Capital analyst Anthony Chukumba cautioned investors.

“We are disappointed with the Court’s decision to not compel Rent-A-Center to complete the merger with Vintage. We committed our support for the deal in June due to Rent-A-Center’s strong fundamentals and we recognized the business could be turned around by implementing a disciplined strategy,” Bryant Riley, chairman and co-CEO of B. Riley Financial, said in a statement last night.

Vintage declined a request for comment.

Rent-A-Center shares rallied 3.1 percent at 10:00 a.m., are on track to close at the highest since October 2015.

Loop Capital, Anthony Chukumba

“Deal termination a positive, but don’t count on the breakup fee,” Chukumba wrote, adding that even if Rent-A-Center gets a ruling in the company’s favor it would be a stretch for Vintage Capital and B. Riley “to cobble together the money.”

“Rent-A-Center is likely better off remaining a publicly traded company rather than selling to Vintage Capital for $15.00 a share, given the dramatic improvement in Rent-A-Center’s performance since the deal was announced last June.”

Rates hold, price target $20.

Janney, John Rowan

With shares trading above $21, yesterday’s decision removes the downside to $15/share, which was the go-private price “had the decision gone the other way.” If the judge rules in Rent-A-Center’s favor on the breakup fee it would add 10c to 2019’s earnings estimate.

“We believe that the issues facing the company since 2016 have been a combination of a cyclical downturn in the industry coupled with a self inflicted blow from a failed roll-out of a new point-of-sale (PoS) system. Management has done a good job of moving past the PoS issues and cutting costs to align the company with today’s environment.”

“We had moved back to a PE based valuation when RCII sought to terminate the agreement and we will continue to do so,” Rowan said.

Rates neutral based on valuation; fair value estimate raised to $21 from $19.

Raymond James, Budd Bugatch

“It could be an extended time (6 months, maybe a year) before we know of the outcome on the reverse breakup fee.” which may await an appeal of yesterday’s decision.

Raised rating to outperform from market perform and set 12-month price target at $25, which reflects “better fundamentals” and doesn’t include a break fee.

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