By and  on October 17, 2007

Icelandic firm Baugur Group is the leading contender to make an offer for Saks Inc. — but don't expect one until at least after the holiday season.

Financial sources said early this week that executives at Baugur met with their counterparts at Saks about two weeks ago. On Tuesday, Wall Street analysts were trying to get a read on the feasibility of a deal as well as a price tag for the retailer. Sources agreed Baugur was the most likely candidate to pursue Saks.

Baugur took an 8.1 percent stake in Saks in July, emerging as the company's second-largest investor. The largest shareholder remains Mexican billionaire Carlos Slim Helu who, with other family members and through Immobiliaria Carso SA De CV, owns nearly 13.3 million shares, or a 9.3 percent stake.

The Icelandic firm has made no secret of its desire to enter the U.S. market. Baugur's newly appointed executive chairman and former chief executive officer Jón ásgeir Jóhannesson said in 2006 that his firm wanted to start operations in the U.S. in 2008. The group already has a U.S. presence through Mosaic Fashions, a holding company for Karen Millen stores in Atlanta, Boston and Los Angeles.

As for any interest in Saks, a spokeswoman for Baugur declined comment, but confirmed the company's stake in the high-end luxury retailer. Reports in the U.S. also had a Baugur executive from Iceland relocating Stateside. The spokeswoman disputed that, but acknowledged that Jóhannesson recently bought "a property in New York."

Sources believe Baugur is beginning preliminary courtship talks to convince the Saks brass about the feasibility of a buyout of the luxury retailer. However, it is widely believed among Wall Street sources that any offer is unlikely to come until after the holiday season is over because both sides will want to see how that key sales period plays out.

Citigroup Global Markets retail analyst Deborah Weinswig said in a research note late Monday, "Saks is one of very few public (NYSE) luxury retail companies that remain and because of its strong [New York] presence, it is a brand that has global recognition and can translate well internationally. Also, [Saks] has had some experience abroad through its licensed agreements in Saudi Arabia, the United Arab Emirates and over the next few years in Mexico and China. Based on these factors as well as the weak U.S. dollar, we believe [Saks] could interest both domestic and international private equity investors alike."Weinswig said although Saks management has not officially put the company up for sale, "We believe they would consider a potential transaction if the terms are attractive and created more shareholder value than the continuing operations of the business."

A Saks spokeswoman last week declined comment when asked about speculation of a buyout.

According to a published report in the U.K.'s The Independent on Tuesday, rumblings in the U.S. were that "Baugur was set to bid for Saks Fifth Avenue, with an offer worth between $26 and $30 a share imminent," or about $3.7 billion to $4.3 billion. Saks' debt at the end of the last quarter was only $575.4 million, making it even more attractive to a potential buyer.

Wall Street analysts who track Saks and issued reports Tuesday had a lower per-share range for any possible offer price for the retailer.

Bear Stearns retail analyst Christine Augustine in her report Tuesday wrote that a $23-per-share buyout range is feasible. She added, "We are reluctant to get more positive on the shares based on the fundamentals, particularly given the inconsistent gross margin performance, and the reliance on strong same-store sales growth amid an uncertain macroeconomic backdrop (although we believe the luxury consumer remains strong at this point). We believe that the company may face some 'bumps in the road' as management continues to execute its turnaround strategy."

Citigroup's Weinswig has a target price of $22 for the retailer's shares, versus the current trading range of $19. Presuming shares of Saks hit the $22 target, a 20 percent premium would bring it to an acquisition price of $26 per share.

Baugur spent about $250 million, or $22 per share, to up its stake in Saks this past summer. The firm's frequent partners in investments include Icelandic bank Glitnir, Bank of Scotland and West Coast Capital, which was launched in 2001 by Scottish multimillionaire Sir Tom Hunter.

U.S. sources said West Coast Capital could be a possible financial partner of Baugur's in a future investment in Saks. However, a spokesman for West Coast Capital said, "We have no intention of bidding for Saks. We've coinvested with Baugur in the past, and we would do it again. But we have no intention of bidding for the store."In addition to Karen Millen, Baugur owns the U.K. women's fashion brands Oasis, Whistles and PPQ, all of which could have a presence in the U.S. market via Saks stores if a deal were to be done. Baugur also has a stake in the designer Matthew Williamson and Steinunn, an Icelandic ready-to-wear brand that launched in Takashimaya's New York store earlier this year.

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