Pier 1 Imports offered to issue 0.6 of its share for every share of Cost Plus, which implies a price of $4 per share or approximately $81 million. The offer is 31% higher than Cost Plus' closing share price on Friday and 34% higher than the company's 30-day average share price. Share of Cost Plus, which closed at $3.05 on Friday, opened at $3.77 on Monday and in noontime trading stood at $3.58, up more than 17% on the day. Pier 1 Shares opened at $6.50 and was down to $6.00 in noontime trading, off approximately 10%.

Asking to meet with Cost Plus executives today, Pier One president/chief executive Alex Smith states in the letter that the combination will result in improvements in Cost Plus's operating margins through organizational efficiencies in the supply chain management, shared services, store operations and other general administrative costs. Smith suggests that it can achieve costs savings for Cost Plus in the range of 5% of sales (approximately $50 million). In addition, he says Cost Plus shareholders, who would need to approve the transaction, would enjoy improved operational liquidity and a more active trading market for their shares.

"We are prepared to deliver a draft merger agreement to you and begin discussions immediately," states Smith in a letter to Cost Plus' Board of Directors. "We have engaged JPMorgan as our financial advisor for this purpose, as well as outside legal counsel. Our team is prepared to devote the additional significant resources necessary to ensure a smooth and expedited process."

Pier 1 in Dallas

Absent a transaction, Smith says Cost Plus is "likely to face increasing liquidity problems" while "Pier 1's financial condition is sound." Indeed, he says Pier One committed a $450-million asset-based lending facility that should be sufficient to provide future operational liquidity for both companies.