By  on August 9, 2005

NEW YORK — Rumblings on Wall Street that Gap Inc. might go private sent shares of the specialty retail chain up as high as 4 percent on heavy volume Monday afternoon. But there was a good dose of skepticism in some corners of the market, and the stock cooled slightly.

Shares of Gap Inc., whose three brands reported mixed same-store sales last week, finished the day with a 3.5 percent gain to $21.35. Trading volume was 9.3 million, which is well above the stock's average trading volume of 4.1 million, according to Yahoo Finance. There was no after-market trading on the stock. The stock's 52-week high is $23.75, and the low is $18.12.

Howard Tubin, senior analyst at Cathay Financial, said, "I just don't see why they would want to go private. Their balance sheet has been greatly improved. They have been buying shares back. They grow square footage ... They're back into a net cash position. They're shareholder friendly. There is an interesting growth story here."

Gap could not be reached for comment.

Speculation management of the retailer would take the firm private began circulating in the afternoon trading session. Right before the market closed, Reuters reported investors were putting call options on Gap at $28 a share, which is a 31 percent premium over Monday's close.

Still, given the level of activity in the mergers and acquisitions market over the past 18 months, Gap looking to take itself private is not a far-fetched idea. Private equity investors such as Bain Capital Partners and Cerberus Capital Management have made significant investments in retail. Earlier this year, J.C. Penney was said to be the target of an acquisition by private equity firm Cerberus. And, as reported in WWD Monday, financial sources said Bon-Ton Stores Inc. and Cerberus may be partnering on a possible bid for Saks Inc.

Taking Gap private would require the involvement of company founder Don Fisher and Fisher family members who have a controlling interest. Tubin and two other industry sources familiar with the company said it would be unlikely for the Fishers to give up their stake in the company. The family owns about 17.3 percent of Gap."Economically, it makes sense based on the multiples. Whether it's realistic or not depends on large insider shareholders and whether they support the management," said William Susman, president and chief operating officer of Financo Inc.

According to filings with the Securities and Exchange Commission, the net activity of trades on the stock by insiders has totaled 5.8 million over the past three months. Of the 38 insider transactions during that time, 37 have been sales. And since July 12, the Fishers have sold about 2.7 million shares.

A hedge fund manager, who spoke on the condition of anonymity, agreed with Tubin. "Most people don't want to take on one turnaround, let alone three," he said.

August comps at Gap's U.S. stores dipped 8 percent, while Old Navy fell 5 percent. Banana Republic's comps showed a 7 percent gain, but lost 6 percent in June and 7 percent in May. In June, Gap was up 3 percent while Old Navy was flat.

— With contributions from Meredith Derby and David Moin

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