By  on June 4, 2007

NEW YORK — The bidding war for Barneys New York could come down to who blinks first.

Two Middle Eastern investment entities are said to be in keen competition to buy the designer retailer — one, the Qatar Investment Authority, and the other, Istithmar from Dubai. And while no deal is certain, the winner would end up paying a steep price: Financial and industry sources said the amount discussed is higher than the $1 billion to $1.2 billion that Barneys' owner Jones Apparel Group is said to be seeking. Several believe the bidding could go as high as $1.4 billion, a hefty sum for a chain that, while upscale, only has 34 stores.

Financial sources said a deal could be completed soon, perhaps within the next seven to 14 days as the bidding has heated up in the last two weeks. Once they gain control of the retailer, both entities are believed to be keen on keeping existing management at Barneys, led by chairman and chief executive officer Howard Socol, in place.

A spokeswoman for Jones declined comment. Reached on Sunday, an official at the Qatar Investment Authority declined comment, while Istithmar could not be reached for comment.

Barneys currently operates seven freestanding stores, with another set to open in San Francisco in September; 14 Co-ops, and one set to open in Hackensack, N.J., and 13 outlets. Still, it is the chain's largely untapped expansion potential in the U.S. and especially abroad that is driving up the price. While Barneys has been successful in rolling out its Co-op format in America, there is the potential for even smaller shops in Middle Eastern hotels and tourist locales given the plethora of high-end luxury resort complexes popping up throughout the region.

As first reported in WWD, market sources here and overseas initially linked a private equity fund connected with the royal family of Qatar as the front-runner for Barneys. Qatar Investment Authority is owned by the state, where Sheikh Hamad bin Khalifa Al-Thani is emir. His cousin, Sheikh Hamad bin Jassimal Al-Thani, Qatar's foreign minister, heads up the QIA.

The country's wealth is primarily from oil production and liquefied natural gas, although the mission of the QIA is to invest in trophy assets. Before the discovery of oil in the Forties, Qatar was dependent on the pearl industry for survival. In 1995, new technology allowed it to develop its natural gas reserve in the North Field, which it shares with Iran.Investment arms of QIA include real estate-focused Qatari Diar and London-based Three Delta. Qatar rivals Luxembourg with one of the highest per capita incomes in the world. Business leaders there, eyeing what is happening in nearby Dubai, are eager to develop luxury resort and large-scale complexes to attract tourists. The QIA fund is valued at over $40 billion.

Nearby is Dubai, part of the United Arab Emirates, which gets most of its wealth not from oil, but from the country's investments locally and abroad. Dubai's ruler is Sheikh Mohammed bin Rashid Al Maktoum, and the country's investment arm is Istithmar. The fund's real estate holdings include assets in the United Kingdom and the United States, as well as U.S. discount retailer Loehmann's.

Istithmar is believed to have the inside track in the bidding for Barneys, according to a banking source specializing in mergers and acquisitions. The fund's banker, Peter J. Solomon, would understand the nuances and intricacies of how and where the upscale retailer can expand, as well as Barneys' management depth, for the banking firm was the financial adviser that arranged the sale of Barneys to Jones Apparel Group in December 2004 for $400 million. A spokeswoman for Peter J. Solomon declined comment.

However, the sale of Barneys has also been the subject of an internal struggle of sorts for the $4.74 billion Jones, that involves the group's ceo, Peter Boneparth, and the company's board.

One investment banker said, "Peter has visions of transportability of the brand, which the board doesn't really understand." Another well-placed source from the financial sector believes Boneparth would like to keep the high-end retailer, while the board is pushing to sell.

While the investment banker suggested the QIA is interested in Barneys more as a trophy asset and the other financial source believes Istithmar is keen on developing the specialty chain, both sources are certain that if a sale is completed, the retailer will go to one of the two Middle Eastern players. "That's definitely where the money is coming from in terms of these kinds of investments," the banker said.

Word surfaced in January that, after Jones' failed auction of itself last August, the apparel firm was reviewing options to monetize some assets and figure out how to grow the company, which has the bulk of its brands in the moderate segment sold in department stores. Barneys was at the outset a candidate for a sale, although other options on the table included an initial public offering.Banking sources at that time were estimating Barneys was worth around $800 million to $900 million. Several private equity firms in the U.S. were said to be eyeing the retailer, although investment banking sources said those firms were looking at Barneys more as a value play in the $700 million range. Barneys also snagged the attention of potential strategic buyers such as Neiman Marcus and Nordstrom, both of which considered the acquisition and were talking about offers in the range of $840 million.

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