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BJ's Wholesale Club Makes a Risky Decision to Spurn Sale Offer

BJ's Wholesale Club is a profitable company in a tough spot -- it always looks bad in comparison to its much larger and more profitable club-store competitors, Costco Wholesale Corp. (COST) and Walmart (WMT) division Sam's Club. Which is why its recent decision to turn down a going-private buyout offer from one of the best names in retail private equity may come back to haunt BJ's management.

The offer came from Leonard Green & Partners, which had bought up nearly 10 percent of BJ's stock prior to making the offer. For background, Green is a retail specialist with money in many well-known retail brands, currently including Whole Foods Market (WFMI), Del Taco, The Container Store and David's Bridal. They're known as one of the sharpest operators for turning around retail brands, investing some money, cleaning them up, and reaping profits.

Instead of taking the Green offer, BJ's has opted instead to hold an auction to try to solicit better offers. That's a move they may need to do just to satisfy shareholders that they're getting the best price on their stock when a sale happens.

But this is going to be one of those situations where what's best for the current shareholders may not be best for the company in the long run. The decision to seek other offers has probably pissed off Green -- now a major investor -- and the reality is there aren't that many other potential bidders. There are under a dozen really strong private-equity firms that have the expertise to make BJ's a success, and few others have Green's track record. Bain Capital comes to mind...and not many others. So BJ's has set up a scenario where they may get a higher offer, which shareholders will push for them to accept so they get a big payday. But another bidder may not have what it takes to help BJ's thrive in the future.

Another negative possible scenario here is that BJ's could get no other offers, leaving managers to crawl back to Green and beg to sell them the company again. That situation would give BJ's a very weak hand to play. Shareholders could end up wishing they just took the initial deal.

In the meanwhile, BJ's is doing all it can to put a positive spin on its future. It raised its forecast this week after announcing its quarterly figures, and said it will raise its membership price $5 to $50. That last is a move that could backfire in this economy, but for now it allows BJ's to project rising income that's pure profit. We'll see if private-equity firms buy it -- and take an interest in buying BJ's.

Photo via Flickr user NNECAPA