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Selling Another Piece: Hedge Funds Said Eyeing Saks Department Stores

Bain Capital may be interested in buying Saks Inc.'s Northern Department Store Group.

NEW YORK — Amid internal and external investigations of its Saks Fifth Avenue business, Saks Inc. may have found a buyer for its Northern Department Store Group.

Like most of the deals of the past year in the M&A market, the interested buyer is said to be a private equity player: Bain Capital Partners. A private equity firm is also the likely purchaser of Saks’ Club Libby Lu chain, sources familiar with the business dealings said.

Sources said Saks began discussions with Bain about three weeks ago, and the deal could include other private equity investors.

Representatives for Bain Capital and Saks declined comment.

Another possible scenario is a management buyout of just Carson Pirie Scott, which would prevent the northern group from being split up. A jettison of certain locations is possible should a new owner, other than the proposed management-led buyout, acquire the entire Northern Department Store Group and then decide to flip certain store sites for cash.

One analyst said Carson’s management team had at least one meeting with Saks Inc. executives about a potential buyout. Attending the meeting last week, sources said, was a representative from an unnamed private equity group working with Carson’s management.

The analyst said a management-led buyout might not be Saks’ first choice, since such a deal would “likely leave Saks with few options” for its remaining nameplates.

In addition to Carson’s, the other mid-tier nameplates in the Northern Department Store Group are Bergner’s, Boston Store, Herberger’s and Younkers. Carson’s is over 100 years old, and includes the Bergner’s and Boston Store nameplates in its operation. The NDSG generated $2.2 billion in revenues in 2004, according to Saks.

As reported, Dillard’s Department Stores had discussions with Saks regarding the entire NDSG. J.C. Penney reportedly also has expressed interest. Some retail analysts and financial groups in New York that were polled said they didn’t expect either retailer to step up to the plate.

An analyst in New York at a sell-side firm said Wednesday that it was unlikely J.C. Penney would eye Saks’ NDSG, but said that Bon-Ton Stores could emerge as a strategic buyer for the stores.

Meanwhile, Saks is in the middle of several probes involving its Saks Fifth Avenue Enterprises division: one by its own internal mandate, and others by the U.S. Attorney’s Office in Manhattan and the Securities and Exchange Commission. The initial probes, first disclosed in March, centered primarily on markdown allowances and related accounting issues.

On June 3, Saks disclosed that it had widened its own investigation to include the timing of the recording of inventory markdowns and vendor markdown allowances, whether there were overcollections of vendor markdown allowances in SFAE product categories other than the bridge collection, and whether the company improperly charged vendors for logistical back-end fees, commonly known as chargebacks.

So far, the investigations don’t extend into the Saks Department Store Group, the operating component that encompasses the Saks retail operation outside of SFAE. Following Saks’ announcement on April 29 that it was selling its Proffitt’s and McRae’s businesses to retailer Belk Inc. for $622 million, it dubbed the remaining department store operations the northern department store group. Saks on Tuesday said it expects the transaction with Belk to close on July 5, adding that the regulatory review period for the Belk/Saks deal has since expired.

When Saks announced the asset sale to Belk, Saks’ chairman and chief executive officer R. Brad Martin, said the northern department store group was a worthwhile business. “It’s a business that’s quite profitable,” Martin told WWD at the time. “The stores are either number one or number two in their marketplaces. In the Chicago, Milwaukee, Des Moines and Omaha markets, we’re the number one [retail department store] business, and we are a terrific emerging business in Michigan. We are the number two business in metro Chicago,” next to Marshall Field’s.

Buyers of the northern group, Martin told WWD, would also be able to strengthen their market share as Federated Department Stores sells off stores in certain markets due to its acquisition of May Department Stores Co.

A buy-side fund manager and a sell-side analyst, who requested anonymity, each said on Wednesday that it might make sense for Saks to try to get a sale sooner rather than later, just in case the governmental probes widen to include an overall review of buying practices across the department store sector.

The history of the different nameplates in the northern store group reflects a distribution channel that has undergone immense change amid intense competition. Carson’s, a premier name in Chicago retailing, fell upon hard times and was acquired by P.A. Bergner & Co. — which had already acquired Boston Store into its fold — in 1989 for $753 million. After a going through a Chapter 11 bankruptcy two years later, and a 1996 battle to avoid a hostile takeover by rival Younkers, the business was acquired in 1997 by Proffitt’s for $790 million. Proffitt’s was acquired by Saks Inc. in 1998 in a stock deal valued at $2.1 billion.

Also up for sale is Saks’ Club Libby Lu operation, a 43-store, mall-based operation. Saks acquired the business, which targets young girls in the tween demographic, in May 2003.

One investment source called Club Libby Lu — which is planning to open 20 more sites in 2005 — a “good business with good potential,” and said it could garner a sales price of $30 million or more, depending on the bidding process and how many of the smaller private equity shops elect to get involved.

Another financial source familiar with the Saks sale process added, “You may not be hearing a lot about deals happening, but there is definitely still a lot of money out there waiting to be put to use. A lot of it is hedge fund money.”

By The Numbers
Northern Department Store Group and Club Libby Lu Store Counts.
Nameplate:
Number of Stores
Locations
Carson Pirie Scott 31G reater Chicago, Indiana, Minnesota
Bergner’s14 Central Illinois
Boston Store 10 Southern Wisconsin
Herberger’s 40Minnesota, Iowa, Wyoming, Colorado, N. Dakota, S. Dakota, Nebraska, Montana and Wisconsin
Younkers49Iowa, Illinois, Michigan, Minnesota, Nebraska, S. Dakota and Wisconsin
Club Libby Lu 43 mall and 23 in-store shops Various locations