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New Barneys Owner Sees No Big Changes Ahead

As Barneys New York moves closer to another chapter in its storied history, its new overseas owner, Istithmar, says growth will come first in the U.S. market.

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NEW YORK — As Barneys New York moves closer to another chapter in its storied history, its new overseas owner, Istithmar, says growth will come first in the U.S. market.

Dubai-based Istithmar, which means “investment” in Arabic, inked a deal to buy Barneys for $825 million from Jones Apparel Group, as reported on Friday. David Jackson, Istithmar’s chief executive officer, told WWD in an exclusive interview Monday that his firm’s role is to help Barneys grow — and not to change it.

“We see Barneys as a differentiated retailer, with growth opportunities,” Jackson explained. “We will continue to look forward with [Barneys ceo] Howard Socol and his team, helping if we can in other areas of expansion….As owners, we will not get into micromanagement. Howard and his team see opportunities [here in the U.S.], and we will work with them to define and refine that strategy…. We will not make any radical change to the company’s business strategy.”

While many industry consultants, and even some investment bankers not involved in the deal, have speculated that international expansion in tourist locales is the primary reason why Barneys would be an attractive purchase for an overseas buyer, Jackson downplayed that analysis.

“I wouldn’t oversell that idea in the sense that we start with underlying businesses that are sustainable, with attractive growth models. To the extent that we can expand into international markets where tourists are, it would be [an opportunity], but the primary business still has to work. From our standpoint, to be attractive in tourist locales, the core business has to work as an existing business before it can [be opened] in a stand-alone tourist compound,” the ceo said.

And, while most private equity firms generally aim to sell or float an asset in three to five years, don’t look for Istithmar to do that with Barneys. One thing the Dubai fund has in its favor is flexibility, and it could hold on to the U.S. retailer for years.

“Whereas a lot of these other private equity funds are forced to sell or recycle the capital, if the asset is still performing, we can decide to hold on to it,” said Jackson. “If the growth flattens out, or if it becomes more of a lower-growth asset, then to a certain extent we [may] look to monetize the investment.”

This story first appeared in the June 26, 2007 issue of WWD.  Subscribe Today.

The Barneys transaction has a so-called fiduciary out clause that allows Jones to consider third-party unsolicited offers for either Barneys or Jones as a whole, provided certain time restrictions are met. Sources familiar with the transaction don’t believe that another outside buyer will come forward, however. One reason why the deal took so long, although it could have been completed months ago, is that Jones was searching for a buyer willing to pay more than Istithmar, these sources said. In addition, a buyer stepping up to the plate now would have to pay more than $845.6 million to close on the deal, since it also would have to pony up an additional $20.6 million to cover the termination fee Jones would have to pay Istithmar.

Marc Cooper, managing director at investment banking firm Peter J. Solomon, which advised Istithmar on the Barneys acquisition, said that, when Jones Apparel Group was up for sale last year, Istithmar at that time expressed an interest in acquiring Barneys. Although Jones was not then interested in selling individual assets, the parties continued discussions on and off regarding Barneys.

Peter J. Solomon advised Whippoorwill Associates and Bay Harbor Management when it sold Barneys to Jones in 2004 for $397.5 million. The two funds bailed Barneys out of Chapter 11 bankruptcy proceedings in 1999.

From a banker’s perspective, Cooper said it is “very rare, but nice, when you put together a sale memorandum [like we did for Barneys in 2004] that actually comes true. Barneys has surpassed that memorandum. It is one of those cases where we set forth to the buying community a plan that came to fruition. This management team [led by Socol] with Jones have exceeded the plan by improving existing operations.”

Cooper explained that the upscale chain has been on target with its store openings, and has exceeded plan financially by a reasonable margin. While he’s not sure of what that margin is, he believes it is between 10 and 20 percent.

Since Jones’ purchase of Barneys, the stature of luxury also has grown. “The luxury market has become more and more important. So you have the performance of the company as a factor, the elevated cachet of luxury, and the continued growth of the Barneys brand. Jones made a smart investment in Barneys. Istithmar is making a smart investment as well because it is getting a better company than the one that Jones bought, one that still has enormous growth potential,” the banker said.

To be sure, Barneys is still a relatively small operation, and perhaps therein lies its potential. According to Cooper, Barneys has potential for more flagships in the U.S., which is still the most important element of the business. “It is the meat of the batting order. I think Las Vegas and San Francisco will be great locations for Barneys, as well as Arizona, and the company is planning a bigger store in Chicago….As for the Co-op [concept], there’s plenty of growth. You could have at least 50 Co-op stores,” the banker contended.

While Cooper didn’t downplay the potential for growth via international stores down the road, what was more interesting is that he thought Barneys has more international potential than other luxury retailers in the U.S.

“The company already has licensed operations in Japan. It has an international presence. There is potential for Bergdorf Goodman [a nameplate operated by Neiman Marcus] to go overseas. The overseas market is more fashion-forward and more differentiated, both of which definitely apply to Barneys,” Cooper said.

Cooper’s firm and Istithmar have worked together before, when it advised the Dubai firm on its buy two years ago of Loehmann’s. So how do Loehmann’s and Barneys compare?

According to Istithmar’s Jackson: “We think both have unique business models and are leaders in their respective areas in terms of how they go about doing their business. From that standpoint, the criteria is very similar.”

Istithmar’s criteria for any candidate for potential acquisition is that, first and foremost, the asset has a unique business model, with sustainable economic growth. And, while Istithmar considers two prongs to any deal, a private equity viewpoint and a real estate aspect, Jackson said the two are not based on a quid pro quo basis. “What we look at from a private equity business doesn’t have to have a real estate angle. If both are present, we have skills that can leverage both, but it is not a necessary [requirement for investment],” the ceo said.

According to Jackson, the fund has deployed more than $4.5 billion in capital on investments here and abroad. The fund’s investments are currently split 50 percent in private equity interest and 50 percent in real estate.

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