U.S. Markets open in 5 hrs 49 mins

Why Rent-A-Center Shares Jumped Over 11% Monday Morning on Settlement

Daniel Miller, The Motley Fool

What happened?

Shares of Rent-A-Center (NASDAQ: RCII), a provider of rent-to-own options for products such as consumer electronics, appliances, computers, and furniture, among other products, jumped over 11% Monday morning after the company agreed in principle to settle all litigation with Vintage Capital Management and B. Riley Financial in regard to the termination of their planned merger.

So what

To provide investors with some history, Vintage Capital had offered to acquire Rent-A-Center at multiple price points ranging between $13 and $15 per share after Rent-A-Center's revenue had stagnated for years and margins declined. But the acquisition derailed late in 2018 when Rent-A-Center announced it was terminating its merger agreement with Vintage Capital because the company did not receive an extension notice from Vintage Capital by the Dec. 17, 2018, deadline.

Now, with the litigation settlement, Rent-A-Center will receive $92.5 million in cash related to the termination of its merger deal, with management expecting about $80 million of proceeds after costs and fees. Originally, the terms were for Vintage to pay a breakup fee of $126.5 million, much higher than typical fees around 3% of a deal's value. Rent-A-Center's merger with Vintage Capital was valued at $1.36 billion.

Front of a Rent-A-Center retail location.

A Rent-A-Center retail location. Image source: Rent-A-Center.

Now what

The settlement does at least two positive things for Rent-A-Center and its investors. It removes a cloud of uncertainty that had followed the stock since the termination of the merger and avoids further litigation costs. The settlement also enables management to put its entire focus on its strategic turnaround plan to grow its business. At least one financial analyst is jumping on board: Raymond James analyst Budd Bugatch raised his rating to a "strong buy" from "outperform," citing improved financial performance from the depths of the past few years as an underlying reason for the upgrade.

More From The Motley Fool

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.