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Financial Players Lead Race to Snap Up Neiman Marcus

NEW YORK — The Neiman Marcus Group hung a for-sale sign on the door Wednesday, and shoppers are looking.<BR><BR>Neiman’s said Wednesday morning that it hired Goldman Sachs to seek “strategic alternatives,” for the luxury...

NEW YORK — The Neiman Marcus Group hung a for-sale sign on the door Wednesday, and shoppers are looking.

Neiman’s said Wednesday morning that it hired Goldman Sachs to seek “strategic alternatives,” for the luxury retailer. With more than $100 billion in the American private equity market available right now and countless billions available overseas, the group is ripe for either an outright acquisition or at least someone buying enough shares to gain control of the board.

WWD reported on Feb. 22 that the Smith family, which controls the largest percentage of Neiman Marcus Group’s voting stock, was looking at ways to realize the value of its shareholding.

While sources said at the time that the Smiths were considering a secondary offering, those now said to be kicking the tires of the high-end department store include LVMH Moët Hennessy Louis Vuitton and even Federated Department Stores, which is in the middle of a $17 billion deal to buy May Department Stores. But a more likely scenario is a consortium of financial players coming together to buy the chain.

Investors Take Stock

Either way, Neiman’s announcement drove up its stock price Wednesday by 15 percent. As Wall Street digested news of the potential sale, and a possible bidding war as a result, shares of the retailer’s Class A stock jumped Wednesday to $86.14 in trading on the New York Stock Exchange while the Class B stock soared 17 percent to $84.80. The gains pushed both classes of stock to 52-week highs. Nearly 3.8 million shares changed hands Wednesday. The average daily trading volume is just 183,500 shares.

Stacy Turnof, analyst at Merrill Lynch, wrote in a research note that the stock price could rise as high as $100 a share, which would make the entire company worth $4.9 billion. Shares of Neiman Marcus already surpassed Turnof’s low-end estimate of $80 a share in Wednesday’s trading session. For the second quarter ended Jan. 29, Neiman Marcus reported 49.4 million diluted shares outstanding.

Turnof noted that Richard Smith, Neiman’s chairman, has made public his interest in selling his shares. The analyst said the Smith family owns about 15 percent of the shares outstanding, and she believes that Smith, 81, “could be the catalyst behind the company’s decision to ‘consider strategic alternatives.’”

A Hefty Price Tag

Following Neiman’s announcement, Standard & Poor’s Ratings Services placed Neiman’s “BBB” corporate credit and senior unsecured debt ratings on CreditWatch with negative implications. The ratings firm also put a price tag on the retailer of up to $5 billion.

“Because Neiman Marcus has been a highly successful retailer of luxury merchandise and is continuing to enjoy strong sales and earnings gains, we believe that any sale of the company would likely be at a significant premium to EBITDA,” said S&P credit analyst Gerald Hirschberg, adding that the firm could fetch between $4 billion and $5 billion.

“Thus, whether the company were sold to another operator or to a financial buyer, the impact of a debt-financed transaction would likely result in increased leverage and reduced cash flow protection,” the S&P analyst said.

The ratings firm said Neiman’s debt obligations are about $250 million, and said the retailer maintains an unusually low debt leverage, which has helped contribute to strong cash flow protection.

Who Would Buy?

Some sources said Wednesday that they believe a financial buyer is more likely to pursue Neiman Marcus, though it is possible that a retailer could make a run at the luxury firm. There is just a slim chance that Federated  would be interested, considering its purchase of May for $17 billion in cash, stock and debt earlier this year. Federated has reportedly considered Neiman’s in the past, and Federated’s chairman and chief executive officer, Terry Lundgren, once ran Neiman’s.

“It’s still a possibility. Federated generates enough cash to be able to do this,” said one source close to Federated.

The source said that a strategic buyer makes more sense than a financial buyer, since another retailer could gain synergies and cut costs by eliminating Neiman’s corporate back-office functions, such as logistics, technology and maybe a distribution center. “At this stage, Neiman’s would be a relatively small deal for [Federated], but the timing certainly isn’t the best.”

Turnof said because of possible widespread interest from both financial buyers and overseas companies, “We believe there is a high probability that either a private equity firm or a European retailer will buy the company.” She added that it was “unlikely” an apparel manufacturer would do what Jones Apparel Group did with Barneys, mostly because “none are big enough” to make the acquisition. While Jones paid $397 million for Barneys New York, she wrote that the price for Barneys is “far below what we believe Neiman should command.”

One investment banking source in New York said at least three private equity groups have expressed a keen interest in buying Neiman’s.

Bill Sussman, president of investment banking firm Financo Inc., said, “Premium properties deserve premium prices. In today’s financing markets, financial buyers can be as competitive as strategic buyers.”

Richard Kestenbaum, principal at Tri-Artisan Partners, observed, “Neiman Marcus is at the top of their game. The challenge for them will be to tell a true long-term growth strategy to a long-term buyer that will enable [Neiman Marcus] to get a huge multiple.”

Kestenbaum thinks financial players are more likely to buy the retailer. “The Europeans are not the likely buyers for this company,” he explained. “Neiman Marcus is more American than Barneys New York, and the Europeans didn’t buy Barneys. If you didn’t like Barneys, you’re not going to go after Neiman Marcus. The reason is that there’s a merchandising sensibility that has to resonate with the acquirer [first before deciding] to purchase a merchandising business. In addition, the market for Neiman Marcus is smaller than Barneys because it is a bigger operation.”

Kurt Barnard, president of Barnard’s Retail Consulting Group, said a likely acquirer would either be someone who would view the retailer as a trophy, “such as a Saudi Arabian oil magnate,” or Neiman’s could be picked up by “a European company benefitting from the low price of the [U.S.] dollar.”

Walter Loeb, retail consultant of the firm that bears his name, suggested two candidates in the strategic buyer corner. “LVMH Moët Hennessy Louis Vuitton might be a buyer because of Neiman’s high standing in the U.S., and it fits with the LVMH merchandise orientation,” he said. “I also think Nordstrom Inc. could be looking at it as a separate operation from its core Nordstrom business.”

In Europe, analysts had mixed views on how much interest Neiman Marcus would attract.

“Right now, everyone is looking at the American market since the dollar is very low,” said Karine Ohana, managing partner at Ohana & Co., a Paris-based mergers and acquisitions firm. “My clients are looking at America for opportunities because they don’t know how long it’s going to last.”

Ohana suggested LVMH and the U.K.’s A&G Group — led by Lawrence Stroll and Silas Chou, who also own Michael Kors — would likely be among those to kick the tires. But she noted any European bidder would probably face competition from American players who have lots of cash.

“It’s a question of price opportunities,” Ohana said. “I look at it as a real estate deal and a financial deal before being even strategic to have better control of distribution. It’s interesting to invest in real estate in the United States.”

But Philippe Violet Vianello, who heads up mergers and acquisitions at Sterling, a Paris consulting firm, said he would be surprised if any European player made a play for Neiman’s.

“The issue is size,” he said. “And that’s a big amount to swallow.”

Equally, he doesn’t expect interest to be expressed by LVMH or PPR, which are both “more into brands than pure retailing.”

Retail consultant Emanuel Weintraub, president of Emanuel Weintraub Associates, said Americans tend to be a “little myopic” when it comes to speculating on potential buyers. “We think about the Limited Brands and Federated Department Stores, and forget about the great European and Asian companies,” he said.

There are Asian firms such as Dickson Concepts, Seibu and Isetan, and other overseas retailers such as Selfridges, controlled by the Weston family of Canada, which also owns Holt Renfrew.

“The Dickson Group explores those upscale-to-luxury wholesale and retail businesses that we believe possess a strong basis for sustained profitable growth, and could flourish with the support of our global luxury infrastructure,” said Charles Jayson, president and ceo of Dickson North America, in a statement. “While it is our policy to not comment on any individual transaction under consideration, we have the highest regard for Neiman Marcus, their management team and their future.”

Weintraub said there’s a lot of Asian money and European money in the market right now. “I think there will be many potential buyers, and I wouldn’t be at all surprised if there’s major interest on the part of Asian megafirms as well as traditional high-end firms,” he said.

Weintraub went on to say that there isn’t a major U.S. apparel manufacturer that couldn’t finance the purchase of Neiman’s, referring to Liz Claiborne and Polo Ralph Lauren.

Elie Tahari tried last year to buy Barneys New York, but was beaten by Jones Apparel Group, which paid $397 million for the retailer in November. Tahari said Neiman Marcus is “too rich for my blood. Neiman Marcus is a great store and it’s a great opportunity for somebody. Barneys New York was the same size as our company so we knew we could manage it properly. We knew we could put the two companies together and realize a lot of savings because we have an intimate knowledge of the fashion business.”

A Secondary Look

Kestenbaum doesn’t expect the Smith family to pursue a secondary offering. “At the end of the day, a secondary offering is not the way to do it. Buying control of a business is more compelling, particularly with the mergers and acquisitions market as frothy as it is right now.”

One retail consultant said maybe the “Smiths feel they want to turn it into an auction, rather than a secondary offering.

“They could get more money that way, rather than float a secondary offering touching around the price the shares are at now,” the consultant said. “It’s selling 16 times earnings, so for a company that’s relatively mature, that’s a full price.”

Possible LBO

There was speculation that Burt Tansky, president and ceo of the Neiman Marcus Group, could lead a leveraged buyout, perhaps buying the Smiths’ stake with financial backing. Tansky, who is 67, has successfully grown Neiman’s and sharpened its focus, and has a management team in place with plenty of experience in the business.

Arnold Aronson, managing director of retail strategies, Kurt Salmon Associates, said, “They’re trying to satisfy their major shareholder, who’s trying to maximize his price, but they also want to satisfy the rest of the shareholders. Whatever methodologies are being used [to entertain bids], they want to make sure it’s possible for everybody to get into the game.

“An LBO would have to have financial backers, and whether this company is worth as much to a financial buyer as it is to a strategic buyer is a question,” Aronson said. “It usually never works that way. Of all the luxury retailers out there, this is the number-one trophy if a trophy hunter is looking. There’s not that much room for the stock price to grow. It’s close to fully priced at 16 times earnings.”

Weintraub said the company is “going to be looking for the highest possible price, and LBOs are looking for the inside price.”

Perfect Timing

A banker, who requested anonymity and who has completed a number of high-end deals, said, “It’s always hard to sell a business when you have to worry about consistent growth.” He pointed out that the ideal buyer for Neiman’s is a financial buyer who, in an old-style, financial-buyer deal, doesn’t care so much about getting earnings-per-share growth on a consistent basis.

“The interest rates are what affect price more than anything else. Why pick now as the time to sell? The interest rates are so low that if you wait and interest rates go higher, it would be harder to finance the deal,” he said.

Retail sources characterize Richard Smith as a master of timing the sales of his investments. Over the decades, he’s bought bottling, cinema and publishing companies, building them up and then selling them at a premium, making millions. Neiman’s stock is trading very high, its stores are performing well and the company has a strong reputation as the leading retailer in the luxury sector, far outperforming Saks Fifth Avenue and riding the luxury wave like few other U.S. businesses.

Sources said Smith, after having sufficiently funded the growth of Neiman’s through a cautious but steady strategy of expansion through store openings and renovations and enlargements, may see minimal growth opportunity on the real estate front. “New stores are limited,” said one former Neiman’s executive, who noted that the retailer already has a presence in most of the nation’s affluent communities. “You also know that the high-end business is cyclical. Neiman’s has been on a great run, but that’s not always going to be the case. Dick Smith is very smart. He’s timed this perfectly.”

Others, though, believe Neiman’s still has substantial growth prospects, either through generating more sales per square foot in its existing stores, opening smaller formats or through its fast-growing Neiman Marcus Direct e-tailing business. Despite initial concerns over the state of luxury in 2005, so far this year there are few signs the boom is slowing, and Neiman’s should be a big winner from that.

“This is the perfect time to sell the company considering there is money all around,” said a ceo of a specialty retailer. “The Smiths would be more motivated by the timing than anything else. They can get full value for their money. A financial buyer could take it public again. Neiman’s is great property. A lot of people would be interested. I really think it will go to a financial buyer.

“This is not a company that needs a strategic buyer. It’s strong on its own.”

By the Numbers
Neiman Marcus Group
Enterprise Value
 $3.76 billion 
Market Capitalization:
 $4.2 billion 
    
Top and Bottom Lines Grow
Sales
Net Income
2002
$2.9 billion
$99.6 million
 
2003
$3.1 billion
$109.3 million
 
2004
$3.5 billion
$204.8 million
 
    
Profitability Improves
Gross Margin
Operating Margin
Profit Margin
2002
32.25%
6.03%
3.38%
2003
33.07%
7.17%
3.53%
2004
34.53%
9.74%
5.78%

Source: EdgarPro Online and company reports. Enterprise value is equal to the company’s market capitalization plus debt plus preferred stock minus cash and cash equivalents. Neiman’s fiscal year ends in July.