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Will Suitors Pay More For Payless Shoes?

|Includes: Collective Brands, Inc. (PSS)

Ever since Collective Brands (Symbol: PSS), the parent company of Payless Shoes announced its strategic review in August 2011, it has been constantly on the news. According to reports, Collective completed its first round of bidding in January and narrowed 10 companies to have more choices in the second round. The final bidders include Brown Shoe and South Korea's e-Land group.

There was news that e-Land is planning an aggressive bid for Collective at $1.8 billion and MKM partners contended that the bid was way too aggressive and there was no bidding war developing. According to another rumour , e-Land's bid of $1.8 billion is for the whole of Collective Brands along with its debt of 500 millions and this would value the company at $20. Then, last week there was news that Collective is expecting bids in the range of $20-22. So, there are mixed messages coming from the media and analysts have different opinions which add to the confusion. While I have no inside information, I would like to take a stab at this.

I think Collective announced the price range of $20-22 based on the first round of bidding. In a way, the company has tipped its hand. The companies that had bid and won the first round didn't have a way of knowing the price range. Now that they know the price band, they can prepare their final bids accordingly. A company that bid $20 in the first round may want to bid more if it wants to be a serious contender. Since most companies will go for $22 range, the aggressive bidders might go even higher to increase their chances.

In the worst case scenario, Collective will get at least $20 and in the best case scenario, it will get a price north of $22. Based on the current market price of $19.51, I believe the odds favor the investors. However, there is an inherent risk to the analysis since I am basing my hypothesis based on rumors only. Since this bidding process is not public, there is no way of knowing the exact situation. But, if everyone knows the exact scenario, the price would be already reflecting that. Due to the inherent risk, I would risk only very little capital on this investment.

Disclaimer: This article is author's opinion only. The author is not a registered investment/financial advisor. Please do your due diligence before investing.

Disclosure: I am long PSS.