By and  on August 8, 2005

NEW YORK — A day of decision is nearing for Saks Inc. and its Saks Fifth Avenue division.

Speculation is heating up that bidding for the northern department store group of Saks Inc. will enter a new phase between the third week of August and Labor Day, and that the process will lead to offers to buy Saks Fifth Avenue Enterprises as well.

Financial sources in the investment community on Friday said Bon-Ton Stores Inc. and Cerberus Capital Management are partnering on a possible bid for all of Saks Inc., in the range of $28 to $30 a share. That represents a 38 to 48 percent premium above Friday's closing price of $20.25.

Other interested parties are said to be Bain Capital Partners, Thomas H. Lee Partners and Apollo Management. It's possible a consortium among these or other financial players could be formed. Executives at the private-equity firms either could not be reached or declined comment.

A meeting of the Saks Inc. board is scheduled this month, according to two sources, though Saks does not disclose when its board meets. The company would also not comment on the bidding.

A retail source said there were about five interested parties, which have been meeting in Milwaukee with the management of Carson Pirie Scott and Douglas E. Coltharp, executive vice president and chief financial officer of Saks Inc.

Bon-Ton's interest, as first reported by WWD, has been met by some skepticism in the retail community. Bon-Ton's business has been struggling lately and the company has grappled with its two-year-old Elder-Beerman acquisition, but Bon-Ton has been able to eliminate costs by combining operations. "The comp stores have not been positive, but they have dramatically reduced SGA, so margins are improving," said a retail chief executive officer. With the northern group, "Bon-Ton may have too much on their plate. The question is, how much debt can you take on and reasonably retire that debt over the next few years? I am sure they are trying to determine that with a financial partner."

The York, Pa.-based Bon-Ton operates 139 department stores and two furniture stores in 16 states from the Northeast to the Midwest under the Bon-Ton and Elder-Beerman nameplates. Last year, Bon-Ton had $1.31 billion in sales. Saks Inc.'s northern group generated revenues of $2.2 billion in 2004, with a store base of 143 units in 12 Midwestern and Great Plains states.Aside from Bon-Ton, "There are a lot of people looking for the whole thing," meaning SFA and the northern group, said one executive with a private-equity firm. "The way these deals work, you get your foot in the door by starting out with one division and then you realize that there is more value in the whole thing. Remember, that's the way it happened with Toys 'R' Us," which initially put Toys on the table and ultimately became a bigger deal that included the sister Kids 'R' Us division. The package was purchased by a consortium that included Bain Capital, Kohlberg Kravis Roberts & Co., and Vornado Realty Trust.

Cerberus already owns Rafaella Sportswear, Mervyn's and Fila, and once considered acquiring Bill Blass. In the $1.65 billion acquisition of Mervyn's from Target Corp., Cerberus was part of a consortium that included Sun Capital Partners and Lubert-Adler/Klaff and Partners. Cerberus tends to make investments in distressed companies. Past investments have included G&G, Guilford Mills and Frederick's of Hollywood.

While the Blackstone Group has also been rumored to be an interested party, another source familiar with the private-equity firm's strategies doubted it would be interested in the northern group alone, which includes Carson Pirie Scott, Younker's and Bergner's. Officially, Saks Inc. has only put the northern group and the Club Libby Lu specialty chain up for sale, and not its Parisian and Saks Fifth Avenue divisions. Earlier this year, the southern group, consisting of the Proffitts and McRae's department store chains, was sold to Belk for $622 million. The strategy has been to sell off the department stores to feed cash into Saks Fifth Avenue and reduce corporate debt.

The board at Saks Inc. and Saks Inc. chairman and chief executive Brad Martin might be quietly leaning to a sale of the whole company, considering the difficulties Saks is experiencing, with its second-quarter earnings filing delayed until September and internal and governmental probes into certain of the company's markdown allowance and accounting procedures.

"If someone throws Saks Inc. an offer for the whole thing, the board would have to look at it," said a source familiar with the firm.

There are also rumors the management of Carson Pirie Scott, led by Michael MacDonald, ceo, and Tony Buccina, president, could be contemplating a management buyout with a private-equity firm. While one Seventh Avenue source indicated the Carson's team is "aggressive," another former retailer characterized MacDonald as "level-headed" and very aware that an independent northern group would be tough to run, in light of stronger and bigger competitors, such as Federated Department Stores, which is taking over May Department Stores, including the Marshall Field's division for $17 billion, including debt. Field's has long upstaged Carson's in the Midwest."There are risks to a leveraged buyout," said the source.

It is believed the $2.7 billion Saks Fifth Avenue Enterprises could command a high price tag given its brand equity, the appeal of a growing luxury assortment and the fine physical condition of most of its 56 stores. Saks, over the years, has been diligent in maintaining its real estate. Saks Fifth Avenue owns about 60 percent of its real estate. The Fifth Avenue flagship, the most expensive property, is valued at $1 billion. There are several other very valuable Saks properties, including in Beverly Hills and Chicago. Some of that real estate could be sold to help fund its purchase.

A sale of Saks Fifth Avenue, the northern group, or both, will result in management downsizing, particularly at the Birmingham, Ala., headquarters for the Saks Inc. department store operations.

Saks does have a lot of upside potential, considering its low stock price and unimpressive margins. In addition, the brand name is still strong, despite the chain's difficulties. For these reasons, Saks is considered a desirable acquisition. Even a slight improvement in its operations would be considered a "successful" return on investment dollars, observed one hedge fund player.

Another hedge fund analyst said an LBO of Saks Inc. makes "perfect sense because of the value of the real estate, cash flow and available cash on hand." However, its sales have not been as strong as its competition's, particularly Neiman Marcus. Saks has been trying to restore its business with a battery of strategies aimed at modernizing its image and chipping at the market share of Neiman's. It's got a management team filled with experienced talent, some say overcooked with talent, and this fall, they will present a comprehensive cashmere promotion chainwide, "Wild About Cashmere," to show the company is willing to make a strong commitment to fashion and special events and generating some buzz.

It's also been building a stable of luxury, designer and contemporary brands, forming partnerships with Graff diamonds, Marni, Luella Bartley, Valextra, Roger Vivier and John Varvatos, and has been installing new shops for Marc Jacobs, Dolce & Gabbana and Chloé, among other designers.Meanwhile, strategic players have expressed interest in bidding for Club Libby Lu, including Too Inc., Claire's Stores Inc. and Build-a-Bear Workshop, according to a financial investor familiar with the process, who said a sale of the entire company would not include the $30 million Club Libby Lu operation. Executives at Too, Claire's and Build-a-Bear could not be reached for comment.

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