By and  on February 2, 2010

The opportunity to buy Barneys New York at a bargain-basement price, if it ever existed, might be disappearing now as owner Istithmar World stands behind its asset, and valuations in the luxury market improve against a backdrop of stabilizing sales.

“Luxury is trending well these days, and things are looking up,” said Gary Wassner, president of Hilldun Factors, whose clients include mostly high-end fashion designers. “Our relationship with Barneys is excellent, and we increased our credit line for them recently.”

According to Wassner, not only are luxury sales better now than three months ago, but also “the sense of gloom and doom is gone....People are feeling that the consumer is getting comfortable with the idea of buying again. The worst of the job losses is over, and now it is a matter of rebuilding.”

He said among his clients, comparable-store sales numbers are up, firms are shipping to more retailers and they’re getting paid sooner. “There are fewer store delinquencies. Scoop is paying [their invoices],” he said, referring to last year when specialty retailer Scoop was having issues paying certain accounts.

In December, high-end retailers Neiman Marcus Inc., Nordstrom Inc. and Saks Inc. posted comp increases of 4.9 percent, 7.4 percent and 9.9 percent, respectively.

The uptick in luxury is good news for Istithmar, which has had precious little to celebrate. Last month, the cash-strapped investment arm of the state-controlled holding company Dubai World named Andy Watson as interim chief executive officer to succeed David Jackson, who has left the company. Jackson spearheaded Istithmar’s overseas expansion, including the purchase of Barneys from Jones Apparel Group Inc. for more than $900 million in 2007.

Dubai World has stood by its Barneys investment even as it restructures about $26 billion in distressed debt on its books — with a $10 billion bailout from neighboring Abu Dhabi arriving perhaps just in the nick of time late last year — but there’s no guaranteeing restructuring can be accomplished without the Middle Eastern firm having to shed some of its assets. Investment boutique firm Perella Weinberg Partners, said to have received a $100 million investment from Istithmar, was hired in August by Barneys to advise on options over the restructuring of its debt.

A large portion of Barneys’ bank debt is held by two hedge funds, Ron Burkle’s Yucaipa Cos. and Richard Perry’s Perry Capital, and last week reports surfaced Yucaipa offered to invest $50 million in the retailer, cutting Istithmar’s ownership stake to 20 percent. That offer was made in December, according to published reports, when Jackson was still ceo.

A spokesman for Yucaipa didn’t respond to a request for comment Monday, and a spokeswoman for Barneys declined comment, noting only that holiday sales “exceeded expectations” and that the company is optimistic for 2010.

A source familiar with the offer said Yucaipa is friendly with Dubai World, and if Istithmar is looking for a partner, Yucaipa would like to be that partner. The source noted Burkle likes the Barneys brand and the company, and is eager to get more involved with the retailer. Yucaipa is willing to invest more if Barneys needs more funds, this source said. He also said the proposal to invest $50 million in Barneys via a loan “is a starting point.”

If such a deal were to take place, Yucaipa could choose to buy out Perry Capital’s debt stake, or Perry Capital could keep its debt holdings and stay on as a lender to the firm.

Yucaipa is no stranger to retail and apparel. It holds investments in Scoop, Sean John, jewelry design firm Stephen Webster and Zac Posen. It also bid for some of the assets of bankrupt Hartmarx Corp. in 2009.

One banker, who has done many mergers and acquisition deals in the apparel sector, said, “The fashion brands Yucaipa has invested in have no relevance or synergy to a Barneys deal. This offer is an independent play and represents an investment in Barneys.”

Another banker noted, “Barneys represents different brands and different opportunities. This is about somebody putting equity into a company and helping it grow.”

While Istithmar said throughout 2009 it had no intention of selling Barneys and in fact pumped additional money into it in April, the current uncertainty of global economics make a sale impossible to rule out. But as business improves, and valuations for mergers and acquisitions recover, price tags won’t be shrinking.

“I think if Burkle can pick it up at the right price, this is as good a time as any to buy. He can provide [financial] resources the business needs going forward, such as remerchandising the store a bit. There comes a point in time when you look at debt restructuring, and sometimes you have to conclude maybe someone else coming in can do a better job,” said Allan Ellinger, senior managing partner at MMG, an investment banking firm.

William Susman, president and chief operating officer at investment banking firm Financo Inc., observed: “The Barneys brand is a very well-known global brand that has a place in the marketplace. I think it may be difficult in locations such as Dallas where it competes head-to-head with Neiman Marcus, and is in locations such as Las Vegas and Scottsdale, Ariz, where it needs time to grow into profitability. However, fundamentally it is a globally transportable franchise.”

The problem, however, remains Barneys’ capital structure, and a debt load might make it impossible to grow the brand.

“If purchased at an attractive price in this market, Barneys would be a great investment,” Susman said. “The price at which Jones sold it was a fair price at the time. Earnings probably have come down since then and the market multiples have changed. Barneys could be bought for a fair price in today’s market.”

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