The Wall Street View

Dana Cohen, equity analyst at Bank of America Equity Research, said R. Brad Martin stepping aside was a surprise, but that there will not be any major changes in trajectory as a result.

Dana Cohen, equity analyst at Bank of America Equity Research, said R. Brad Martin stepping aside was a surprise, but that there will not be any major changes in trajectory as a result. Cohen also said in a research note that the door is open to a possible Saks Fifth Avenue transaction, but added it likely would happen later, not sooner.

“We have never ruled out a potential transaction for the Saks Fifth business; rather, we have thought valuation was the sticking point between management and potential suitors,” Cohen wrote. “Given that management spent some time enhancing the margins at Parisian, then put the business on the market, we would not rule out a similar process for Saks Fifth. However, we think some time will be first devoted to turning the performance at the business.” Cohen maintained a neutral rating on shares of Saks Inc.

While the changes affecting Wilson and Martin are significant steps to right-size the company, additional cuts are inevitable, as assets continue to get sold and resources are allocated to individual businesses, such as Parisian and SFA, and decentralized. Some corporate and back-office support infrastructure has to be retained to support Saks Inc.’s businesses and to fulfill support service agreements with Belk and Bon-Ton. Officials said through “the strategic restructuring” of its organization, it is preparing for the independent operation of Saks Fifth Avenue and Parisian.

Consultant and former Wall Street retail analyst Walter Loeb observed, “I think this indicates that they will split the whole thing up and sell the company. Sadove is an administrator. In my opinion, you’ll hear an announcement of Saks up for sale very shortly.”

Others also were expecting a sale, although their time frame was somewhat further out.

“Today’s announcement, we think, increases the possibility of the eventual sale of SFA along with the rest of Saks. Our read is that Brad Martin has been a chief proponent of having existing management continue to run SFA, and now his day-to-day role in the company would seem to have been reduced,” wrote Robert Buchanan, analyst at A.G. Edwards Inc.

The analyst pegged the likelihood of such an event “occurring or not occurring at roughly 50-50 over the next two years.” He wrote that, with private equity capital still chasing deals, the “midpoint of potential buyout offers [is] in the $21 to $22 [per share] range based on the real estate values or earnings potential under capable management.”

This story first appeared in the January 10, 2006 issue of WWD.  Subscribe Today.

Stacy Turnoff, analyst at Merrill Lynch, believes that SFA is worth between $18 and $21 per share. She noted that Parisian, a 40-store operation, had $700 million in sales in 2004. She estimated a sale of Parisian on an aftertax amount of between “0.5x or 0.9x sales, or $350 million to $630 million.” The midpoint amount of $490 million, she added, is $17 million more than the $473 million that Saks paid for Parisian in 1996.

Investors at institutional firms were pleased with the news, believing that a sale of SFA would happen by mid- to late 2006 or early 2007.

“In six to 18 months, I’m betting that SFA will be gone. Once all the deals are done in selling assets like Parisian, the company’s balance sheet will be in phenomenal shape and the company could even become overcapitalized,” noted one sell-side analyst.

The analyst believes that Saks Inc. is proceeding in the right order, first ridding itself of certain assets and then using a couple of quarters to show great earnings while it is undergoing a turnaround.

A portfolio manager for an institutional firm called the changes “very exciting. Brad was the hurdle to the whole process, whereas Steve has sold businesses before.”

The portfolio manager said the retailer once received an offer for all of Saks Inc. last August at $26 a share, but that had been rejected by Saks Inc.’s board. He believes that private equity firms such as Bain, Texas Pacific, Cerberus and Blackstone are the likely players to take a second look at the luxury chain.

Another portfolio manager added, “This will be a slow process that will take a couple of quarters. Brad needed to move on and the company needed to get rid of assets so that all you have left is just SFA because that will make it easier to put a valuation on the company. It means no hiding of the performance of the business.”