Pier 1 offers to buy Cost Plus for $88.4 mln

ATLANTA (Reuters) - Home decor retailer Pier 1 Imports Inc (PIR.N) on Monday said it offered to buy fellow furnishings retailer Cost Plus Inc (CPWM.O) for $88.4 million in stock, sending Cost Plus shares surging as much as 24 percent.

Cost Plus, which sells home furnishings and exotic food and beverages at its Cost Plus World Market stores, said it would meet with financial and legal advisers to review the proposal.

But some analysts gave the deal a thumbs-down, saying acquiring Cost Plus, which reported a quarterly loss last month, would distract Pier 1, which is in the process of turning its business around. Pier 1 shares sank 10 percent.

"Turning around a home-furnishings retailer in the current challenging consumer environment is not easy and places significant demands on managerial resources," Sanford Bernstein analyst Colin McGranahan said in a research note.

"Integrating a relatively large acquisition even as Pier 1 continues to improve on execution that by its own admission has been less than stellar, seems rather daunting," he added.

Pier 1 said it would issue 0.6 shares of its common stock for each share of Cost Plus, which had 22.1 million shares outstanding as of April 14. Based on the stocks' Friday closing prices, the offer values Cost Plus at about $4 per share, a premium of 31 percent.

Pier 1 said it believes a deal could be completed in the third quarter.

"Given our similar customer bases and broadly similar business models, but distinct market positions, we believe Cost Plus is an excellent fit with Pier 1 Imports," Alex Smith, Pier 1's chief executive officer, said in a statement.

Smith added that a deal would improve Cost Plus's operating margin due to synergies with Pier 1 in the areas of supply chain management, shared services, store operations and general administrative costs.

TOUGH ENVIRONMENT

Plummeting home sales and values and tighter credit have compounded troubles for furnishings retailers as higher gasoline and food costs pressure consumers. Linens 'n Things filed for bankruptcy protection last month.

Cost Plus, which has closed some stores this year, posted a wider net loss for the first quarter in May, and forecast a loss for the second quarter. Pier 1 cut its losses in previous quarters through store closures, job cuts and less spending on marketing.

"We are skeptical that a transaction gets completed," Morgan Keegan analyst Laura Champine said in a research note.

JPMorgan is acting as financial adviser to Pier 1, and Gibson, Dunn & Crutcher LLP and Bracewell & Giuliani LLP are acting as legal counsel.

Cost Plus shares were up 57 cents, or 18.7 percent, at $3.62 on the Nasdaq, while shares of Pier 1 dropped 67 cents, or 10 percent, to $6 on the New York Stock Exchange.

(Reporting by Karen Jacobs in Atlanta and Martinne Geller in New York, with added reporting by Eric Yep in Bangalore; editing by Dave Zimmerman and Maureen Bavdek)