By and  on March 18, 2005

NEW YORK — Even though it could be cheaper and easier for an individual investor or private equity group to scoop up the Smith family’s majority stake in Neiman Marcus Group, which put itself up for sale on Wednesday, that’s not likely to happen, financial analysts say.

“If you own the Smith’s stake, you basically own the company because you’d have the majority in voting rights. [Buying that  stake] might be a cheaper way of going about it. But I don’t see that happening,” said Eric Beder, an independent retail analyst. “If someone is going to buy the company, they’re going to buy the whole company.”

If a potential buyer is ready to pay a premium on Neiman’s stock, either for the Smith’s stake or the entire company, they would have to maintain the company’s current momentum to “justify paying the higher price,” Beder explained. To do this, it would require expanding the store base, which would mean that the new owner would have to control the entire company.

Increasing Neiman’s store base would be similar to what retail vendor Jones Apparel Group is doing with Barneys New York, which it bought for $397 million in November, Beder noted. Adding to Neiman’s current roster of 35 Neiman Marcus stores and two Bergdorf Goodman locations in the U.S wouldn’t be difficult, should the right buyer come along. There is plenty of room for 10 to 15 more Neiman stores in the U.S., and both of Neiman’s retail concepts have enough cachet to make it in Canada, Europe or Asia, Beder said.

Yet, “it’s going to be very hard at the end of the day, unless you really believe that the luxury market is going to keep on this growth path for the next five years. You are really going to have to work at that business to pay down that debt,” said Beder of a potential buyer.

According to investment banking sources, the firms that have been approached to buy Neiman’s include: Leonard Green, Thomas H. Lee, the Blackstone Group, Bain Capital and Apollo. Overseas, the interested parties could include LVMH Moët Hennessy Louis Vuitton and Richemont. Limited Stores, as reported, has also been viewed as a potential suitor as well as Texas Pacific Group. Industry sources said Polo Ralph Lauren wouldn’t be interested in buying Neiman’s, and the high price wouldn’t make sense for Dickson Poon.Looking back over deals of the past few years shows that the pure financial buyers tend to look for distressed companies to scoop up while the strategic players often pay a higher price. The financial buyers, mostly hedge funds that are sitting on about $100 billion, also tend to flip a purchase after four to six years.

Regarding Neiman’s stock price, it would get trounced should the Smith family just sell their stake, that is, if they are even allowed to do so, said a buy-side analyst who preferred not to be named. Market expectations have put the sale of the company at between $90 to $100 or more a share, making it worth as much as $5 billion. On Thursday, shares closed up 2.9 percent to $88.50.

“Quite frankly, the stock is really beginning to narrow the gap between what a private market value would be. And it’s selling very close to within 10 percent of what a take-out would be,” the analyst said. “If the Smith’s are only interested in taking care of themselves and not the other shareholders, [the stock] is going to get crushed.”

The Smith family owned 31 percent of Neiman’s Class B preferred stock, according to the November 2004 proxy statement. That gives the holders the right to elect at least 82 percent of the board of directors. It’s clear, though, that the Smith family wants out. They have been slowly selling off their stake for years, lately disposing of about 78,000 shares in December. There are currently 48.9 million Neiman shares outstanding.

In any event, because Neiman’s has different classes of stock, it makes the sale of the company altogether more complicated, noted Peter Syrus of Guerilla Capital.

“When you have different classes of stock and different people controlling blocks [of the shares], you get all sorts of strange things happening,” he said. The companies that are performing well rarely get big upside unless there’s a strategic buyer around.” 

For Syrus, a strategic buyer deal is akin to Federated Department Stores’ recent acquisition of May Department Stores for $17 billion. And He doesn’t see Saks Inc. or Nordstrom Inc. having a similar fit with Neiman’s.Still, sources contend a private equity group, such as LVMH or Nordstrom, could be the main players in a bidding war to buy Neiman’s. LVMH could be looking to just buy Bergdorf Goodman or extend its brand by buying and expanding Neiman’s worldwide, whereas Nordstrom could possibly run Neiman’s as another division.

Then again, it might just be that the Smith family sells its stake in Neiman’s should negotiations for the whole company fall apart and the family’s desire to cash out of its 20-year — and incredibly profitable — holding reaches a breaking point. “If somebody makes an offer and [Neiman’s] can’t come to an agreement…the Smith’s could say: ‘We’ll sell our stock to you, then you control the company,’” Syrus predicted.

One caveat remains, however. “If the Smith’s sell their voting shares, I don’t know if those voting powers transfer. The control may not transfer,” said the buy-side analyst. “That is often the case in these separate classes of stock. If that person decides to sell ever, they revert into the normal shares.”

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