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Financial Firms in Lead as Barneys Bidding Enters 2nd Round

Major retailers have dropped out of the bidding for Barneys New York, according to financial sources. Now the focus is on investment firms.

NEW YORK — The bidding for Barneys New York is into its second round — with some notable absences. Neiman Marcus Group, Dickson Concepts and Federated Department Stores are no longer in the running.

Financial sources familiar with the process said that while the high-profile names were thought to be contenders for the luxury firm when Barneys first said it was for sale on June 30, it now appears more likely that the next owner of Barneys will be yet another financial player.

But it could be a few more weeks before a clear picture emerges of final bids for Barneys, sources said.

The high-end firm, with flagships on Madison Avenue and in Beverly Hills and Chicago and four Co-Op stores, hired Peter J. Solomon Co. and Morgan Stanley as its financial advisers to explore “strategic alternatives,” including the sale of the company. Bankers at Peter J. Solomon declined comment on Friday. Bankers at Morgan Stanley could not be reached for comment at press time.

A financial buyer for Barneys seems plausible, given market conditions in which recent deals have involved a number of investment banks and hedge funds with names such as Sun Capital Partners and Cerberus Capital Management LP, who, together, recently picked up Mervyn’s from Target Corp. for $1.2 billion in cash.

Barneys has been under majority ownership of two turnaround investors, Whippoorwill Associates Inc. and Bay Harbour Management, since 1999. The two firms bailed Barneys out from bankruptcy, and investors such as these two tend to hold on to investments for an average of five to seven years.

In the case of Barneys, which has a starting enterprise value of $400 million, financial buyers will likely try to bid down the price compared with a retailer, which would be willing to pay more to gain control of the asset for strategic reasons, said seasoned investment bankers. More important, in terms of Barneys’ future, a financial buyer would operate similarly to Whippoorwill and Bay Harbour by having an exit strategy in place. It also would be likely to maintain Barneys’ current management.

While the idea of another sale down the road might seem distracting for Barneys’ management, it may make good business sense.

A financial buyer could divest any underperforming locations and expand the Co-Op concept and home departments. Barneys could also conceivably be a candidate for an initial public offering.

Right now, Barneys is close to the top of its game, while the luxury segment remains robust. In the latest quarter, the three months ended July 31, income was $891,000, or 6 cents a share, versus a loss of $2.1 million, or 15 cents, in the same year-ago quarter. Earnings before interest, taxes, depreciation and amortization skyrocketed 94.3 percent to $9.3 million, compared with just $4.8 million last year. Sales were up 14.9 percent to $102 million from $88.7 million, while same-store sales gained 13.8 percent. For the six months, income was $4.4 million, or 30 cents, against a loss of $3.3 million, or 23 cents, last year. EBITDA improved by 99.5 percent to $19.8 million from $9.9 million. Sales jumped 19.3 percent to $214.8 million from $180.1 million, while comps were up 18 percent.

Federated Department Stores, as first reported in WWD, was eyeing key locations, not the retailer in its entirety. Neiman Marcus, while a good strategic partner for Barneys, has been outperforming its peers for the last 18 months and apparently prefers to focus on its core operations, including Bergdorf Goodman, rather than expand with another chain. Besides, Neiman’s was willing only to pay so much, said financial sources, who didn’t know Neiman’s top offer. Executives at both Federated and Neiman’s could not be reached for comment.

As for Dickson Concepts, which first made a bid for the specialty retailer while it was in its tour of bankruptcy proceedings between 1996 and 1999, Charles Jayson, president and chief executive officer of Dickson North America, said the company’s policy is not to comment on “acquisition activities.”

He did, however, have nothing but praise for the changes at Barneys.

“I have great respect for Barneys and the highest regard for Howard Socol [Barneys’ chairman, president and ceo]. He has clearly led his team to progress Barneys’ modern position, creating a wonderful experience for upscale consumers, and has fortified the bottom-line results,” Jayson said.

Dickson, of course, remains committed to acquisitions of wholesale and retail businesses, focusing on upscale lifestyle brands with room for continued growth. “We are poised for transactions between $100 million up to $750 million, with wonderful support from the investment community as well, based on our professional management, overall track record and progressive results from [all] of our publicly traded and privately held companies,” Jayson said.

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