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Next for Neiman’s: Due Diligence Advances for Blackstone, Apollo

Two investment firms might form a powerhouse alliance to go after Neiman Marcus. They are Apollo Advisors and the Blackstone Group.

NEW YORK — The sale of Neiman Marcus Group is picking up steam, with The Blackstone Group and Apollo Advisors among those said to be well into the due diligence process.

There was also mounting speculation last week that given the high price Neiman’s will command, a consortium will be formed to buy the company. Neiman’s is expected to be sold at between $4 billion and $5 billion. In its last fiscal year the firm posted over $3.5 billion in sales.

“This would be too big of a deal for one player,” said a source familiar with the investment groups exploring Neiman’s. The source added that six firms, including Blackstone and Apollo, have been conducting due diligence on Neiman’s. Blackstone and Apollo could not be reached for comment.

But a deal is still a few months off. The source said selling Neiman’s is roughly a six-month process that’s about a third of the way complete. Neiman’s announced March 16 that it hired Goldman Sachs to explore various strategic alternatives to enhance shareholder value, including the possible sale of the company.

The Smith family, which controls Neiman’s by owning 15 percent of the shares outstanding, could decide to cash out through a secondary offering. However, one investment banker said that would be tough to do in the aftermath of the attempt now to sell the company outright. Investors would be spooked, said the banker.

According to informed sources, potential bidders have already seen presentations by Burt Tansky, president and chief executive of the Neiman Marcus Group. He reportedly held one-on-one meetings with financial suitors earlier this month in New York.

Last week, suitors were down in Dallas, at Neiman’s headquarters, receiving detailed presentations by senior executives and merchants from the Neiman Marcus Group divisions, which include Neiman Marcus stores and Neiman Marcus Direct. The group also operates Bergdorf Goodman in New York. Neiman’s officials would be pushing category strengths and Neiman’s growth potential.

After all the meetings and presentations are completed, preliminary bids will be submitted. Those with acceptable bids in the range Neiman’s wants, will advance in the due diligence process, getting a chance to open Neiman’s books.

This story first appeared in the March 28, 2005 issue of WWD.  Subscribe Today.

The source suggested that the Saks Inc. department store group, which is reportedly being shopped, could offer a better value for a single buyer or partnership of buyers since its performance is weaker and has plenty of room for improvement. It is believed that Blackstone and Apollo are also examining the Saks department stores.

Consortiums formed to acquire companies are a growing trend. It’s a strategy that spreads the risk. Last year, Mervyn’s was purchased from Target Corp. for $1.2 billion by a partnership consisting of Cerberus Management, Sun Capital and Lubert-Adler/Klaff Partners. Earlier this month, Toys ‘R’ Us was purchased by  Kohlberg Kravis Roberts & Co., Bain Capital LLC and Vornado Realty Trust for $6.6 billion. .

“The real estate bubble is making some strange bedfellows,” said the source familiar with the investment groups. However this person added that in the case of Neiman’s, “It’s really early. People have received the call, and the process is probably in the second round right now. The five or six usual suspects from the investment community have come in and Neiman’s will wait to see if someone flies in from the Middle East or Europe. This process will take six months, and we’re probably in month two.”

While recent speculation about Neiman’s has focused on a financial player or a consortium of players, no one rules out a retailer stepping up, such as Galen Weston of Canada, who controls the Holt Renfrew and Selfridges chains and is said to be interested in expanding his holdings into the U.S. At one point, Weston was a bidder for Saks Fifth Avenue.

An Asian or European retailer or investor could bid on Neiman’s, particularly in light of the weakness of the American dollar. Among the possibilities are Philip Green, who tried to take over Marks & Spencer and controls British Home Stores; Great Universal Stores, which owns a large stake in Burberry, and Investcorp, which previously owned Saks Fifth Avenue, Gucci Group and Tiffany. Other possible players cited are Texas Pacific, KKR, and LVMH Moët Hennessy Louis Vuitton. Goldman Sachs has also invested in retail-fashion, including Polo Ralph Lauren and might help finance a Neiman’s deal.

A surprise bidder could emerge in the very late stages of the sale process. That was the case with Barneys New York, which at the eleventh hour last November was swooped up by Jones Apparel Group for $397 million.

Apollo has been very active in the retail arena in the past few years, having invested in Zale Corp., General Nutrition Centers, and supermarkets, including Ralph’s. “Apollo is obviously interested in retail investment, but usually is involved with finding opportunities that are in a turnaround stage. In that regard, Neiman’s is a little unusual, but not far-fetched,” said an executive familiar with Apollo.

“In light of the fact that Neiman’s will go at a premium, a partnership is not a crazy thought. It could very well happen, though it’s a little premature to predict. Everyone is just getting their arms around the [Neiman’s] business, looking at presentations. Burt has done a fabulous job. He’s maintained the course and has a great story to tell. This property will go for a whopping price.”

However, the source added there is some concern about Neiman’s expansion potential and how long the luxury boom will last, but considering the strength of the franchise, “it’s not a big issue.” Neiman’s, while already operating in most affluent markets in the U.S. big enough to support a Neiman’s door, could expand internationally or or could decide to experiment with new formats.

“Anybody who buys Neiman’s would have to view this as the crown jewel of their portfolio, not as a high-velocity growth machine, but they get a great luxury property,” said the executive. “It’s not something for the faint of heart, and it’s not something to flip in a couple of years. It’s more like a family business, a long-term investment that you become emotionally tied to. For a company like Apollo, they have to get a return on the investment for their clients and have to buy it at the right price and then turn it over in a reasonable amount of time. For an organization like Apollo, it’s a little tricky with Neiman’s.”

Blackstone has invested in over 75 companies in a variety of industries, with corporate partnerships a keystone of the investment strategy. It has partnered with AOL Time Warner, AT&T, Vivendi and other major companies.