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Why Bed Bath & Beyond gave into GameStop ape Ryan Cohen

In carefully weighing its options, Bed Bath & Beyond (BBBY) execs and its board appear to have realized it would be wiser to settle with GameStop ape Ryan Cohen than to wage a longer term battle.

A source familiar with the matter tells Yahoo Finance, Bed Bath & Beyond settled with GameStop executive chairman Ryan Cohen on Friday to avoid a costly proxy contest from shareholders. The struggling retailer also found religion on exploring a sale of its jewel buybuy BABY, the source says.

A spokesman for Bed Bath & Beyond didn't return Yahoo Finance's request for comment.

Another person familiar with Bed Bath & Beyond's thinking says the company formed a committee in January to explore options for buybuy BABY. As part of that review process, buybuy BABY could be sold in its entirety, spun-off or invested in by a strategic partner. A transaction of some kind could come before year end, the source said.

Bed Bath & Beyond's deal with Cohen will see three board members immediately added to the retailer's board: Marjorie L. Bowen, Shelly C. Lombard, and Ben Rosenzweig. Bed Bath's board will balloon from an already gargantuan 11 members to 14 (for a company with only a $2.2 billion market cap).

Bowen and Rosenzweig will join that aforementioned committee focused on exploring alternatives to unlock value from the company's buybuy BABY banner.

Bed Bath shares rose 3% in afternoon trading Friday.

"Our company and board have always been committed to evaluating all options to maximize long-term shareholder value, and we look forward to integrating our new directors' ideas to drive our continued transformation. Our buybuy BABY business is a tremendous asset, and we are committed to unlocking its full value. As we move forward, our goals will continue to focus on delivering value for our shareholders, enhancing experiences for our customers, executing on the transformation throughout our business, and creating new and exciting opportunities for our dedicated employees across all our banners," Bed Bath CEO Mark Tritton said.

Chewy billionaire Cohen disclosed a 9.8% stake in Bed Bath & Beyond earlier in March.

Cohen said in a scathing letter to Bed Bath & Beyond that the company's execution under CEO Mark Tritton has bordered on terrible, compensation is not realistic and the business should be split up (buybuy Baby business sold off) and then sold entirely to financial sponsors (aka private equity).

Cohen believed Bed Bath & Beyond could unlock billions in shareholder value by narrowing its focus and selling itself in parts.

"The resolution announced today represents a positive outcome for all of Bed Bath's shareholders. By refreshing the Board with shareholder-designated individuals who possess capital markets acumen and transaction experience, the Company is well-positioned to review alternatives for buybuy BABY. I appreciate that management and the Board were willing to promptly embrace our ideas and look forward to supporting them in the year ahead," Cohen said in a statement today.

Ultimately, Bed Bath has hit a brick wall with respect to its turnaround — further weakening its leverage with Cohen.

Sales for the just completed three-month period plunged 28% year-over-year. Adjusted operating profits fell $80 million from a year ago. When the company reported its results in early January, it outlined current quarter adjusted earnings of $0 to $0.15. The Street at the time was looking for $0.70.

The stock has plunged 47% from a 52-week high on June 2 (before Monday's reaction to Cohen's involvement).

Should Bed Bath spin off buybuy BABY after the new committee's review, it could leave one critical question for investors: Why is the company even public and should it find a buyer for the remaining core business?

Those unanswered questions likely explains the muted reaction Friday to the settlement with Cohen.

"While an LBO isn't unfathomable, the private equity funds making offers need to become comfortable with two questions: 1) What can I do that hasn't been attempted in the first 2.5 years of the turnaround? 2) Am I comfortable investing in one of the few public retailers that did not see outsized share gains during the pandemic? These items could limit the universe of potential buyers," points out Jefferies analyst Jonathan Matuszewski.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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