Women’s apparel and accessories retailer Bebe Stores is foraying into the home furnishings space, acquiring 47 Buddy’s Home Furnishings rent-to-own franchises from Franchise Group, in a US$35m deal that diversifies its profit stream.

The agreement also grants Bebe the rights to build additional franchises in protected geographies throughout the Southeastern United States.

“This is a transformational acquisition that will not only be materially accretive to Bebe’s cash flow over time but also provides a platform for future growth through the development agreement,” said Bebe CEO, Manny Mashouf. “The acquired Buddy’s stores have a strong and consistent record of free cash flow generation across multiple market cycles.

“This acquisition diversifies Bebe’s profit stream and better utilises existing net operating loss carryforwards. Additionally, the expanded operational infrastructure being developed for this transaction can be leveraged to support additional acquisitions of high free cash flow entities in the future.”

The transaction will be funded by a 1.5m primary share purchase by B. Riley Financial at a price of $5 per share, a $22m secured loan led by MILFAM, LLC, and available cash on hand.

Commenting on the deal, B. Riley analyst Susan Anderson said: “We believe that the deal not only helps lower interest expense through using the $35m cash to prepay a portion of the term loan, but also shifts revenue to higher-margin licensing/royalty fees. The deal is anticipated to lower annual revenue by $35m and adjusted EBITDA by $6m, which indicates on an average store basis that these stores had about $750,000 in annual revenue. As FRG refranchises the remaining stores, we anticipate free cash flow to benefit as royalty income provides high margin revenue that flows almost all down to the bottom line.”

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By GlobalData