By and  on July 30, 2007

Has retailing's leveraged buyout craze come to a grinding halt?

In the past few months, retailers from Macy's Inc. to Tiffany have faced ongoing speculation that they are takeover targets — distorting share prices and distracting operations. But industry watchers say that private equity firms now face slimmer pickings and increased risk in the retail sector as the market fumbles with tighter credit markets and consumer spending concerns.

As a result, analysts see a shift of private funds away from buyouts, which often resulted in hefty premiums of up to 35 percent over a stock's price, toward more strategic deals, including everything from spin-offs and licensing agreements to buying brands piecemeal.

Recent activity appears to bear out that scenario. On Thursday, VF Corp. made a $775 million purchase of Seven For All Mankind and $110 million deal for Lucy Activewear. On Friday, Brown Shoe Co. Inc. acquired an undisclosed stake in Edelman Shoe Inc., which markets the Sam Edelman footwear brand to Macy's, Neiman Marcus, Nordstrom and the Victoria's Secret catalogue, among others. Under the agreement's terms, Edelman's Sam Edelman and Libby Edelman will maintain a majority interest in the company, while Brown Shoe acquired an option to buy the remaining interest in the future.

Meanwhile, Deb Shops announced Friday that Lee Equity Partners LLC acquired all outstanding shares for $27.25 a share or roughly $395 million. Deb Shops said Lee Equity will finance the acquisition through cash and new committed credit facilities. The same day, American Capital Strategies Ltd. and UBS Securities LLC, with Golden Gate Capital as the equity sponsor, announced a $710 million cash infusion for Appleseed's Brands, a private label apparel brand for men and women ages 55 and older.

An informal WWD poll of industry analysts identified a dozen retailers and vendors that would be attractive targets for private equity money based on strong, free cash flow, including Macy's Inc., Nordstrom Inc., Gap Inc. and J.C. Penney, which had free cash flows of $2.38 billion, $878 million, $678 million and $483 million, respectively. Two firms, Gottchalks and Quiksilver, made the list based on availability and potential to generate cash, which is important because private equity firms need cash generation to pay off any incurred debt from a deal or just for investment purposes.

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