By  on November 26, 2008

Saks Inc. saw a poison pill plan as the best remedy for the combined symptoms of a low stock price and an aggressive investor.


The embattled luxury retailer established a preferred share purchase program last Wednesday — one that kicks in when a single investor acquires 20 percent or more of its stock — just days after Mexican billionaire Carlos Slim Helú boosted his stake in the firm to 18.3 percent.

In his own filing with the Securities and Exchange Commission, Slim certified that the shares “were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of the issuer of the securities.”

That may provide scant comfort to Saks, which said in its SEC filing on the poison pill plan, “The board of directors has authorized the adoption of a rights agreement to protect shareholders from coercive or otherwise unfair takeover tactics. In general terms, the rights impose a significant penalty upon any person or group which acquires beneficial ownership of 20 percent or more of the company’s outstanding common stock without the prior approval of the board of directors.”

Slim ranks as the world’s second richest man and amassed his business empire, in part, by acquiring companies on the cheap during Mexico’s 1982 financial crisis.

Inmobiliaria Carso, a trust controlled by the family of Slim, owned 25.3 million shares of Saks as of Nov. 24, boosting its ownership interest by 3.3 million shares in less than a week, according to filings with the SEC. Saks had 137.7 million shares outstanding as of Nov. 1.

Investors pushed shares of the firm up 12.4 percent Wednesday after the so-called poison pill was established. The stock continued to rise in an abbreviated session on Friday, ascending another 7.8 percent to $4.31, well below the issue’s 52-week high of $22.19, but 61.4 percent above the 52-week low of $2.67 established on Nov. 21.

Saks said it would distribute a preferred share purchase right on Dec. 8 for each outstanding share of the company’s common stock. The right would only be exercisable if a person or group acquires 20 percent or more of the company’s stock.

Each right will entitle shareholders, other than the acquiring entity, to buy one one-hundredth of a share of Series C junior preferred stock. If a person or group of investors acquires 20 percent of Saks’ common stock, each right will allow the rest of the firm’s shareholders to purchase a number of Saks’ common shares that have a market value of twice that of the exercise price, thereby diluting the acquirer’s position.

Low stock prices and declining market capitalization since the onset of the credit crisis in September have made many publicly held fashion firms susceptible to takeovers. Last week, they also led Standard & Poor’s to move Liz Claiborne to its S&P SmallCap 600 index from the S&P 500, effective Dec. 2. Even though its shares rebounded last week, to close at $2.85 on Friday, shares have fallen 86.6 percent this year as it’s battled escalating losses, shrinking sales and lower credit ratings.

Slim, through companies he oversees, first took an interest in Saks in March 2000 when his Orient Star investment company snatched up a 7 percent stake. Retail was familiar territory for Slim, who already controlled 86 percent of Sanborn department store parent Grupo Sanborn and an 85 percent stake in Sears in Mexico.

After Slim bought Sears’ Mexican operations, analysts said the deal made sense for Slim’s Grupo Carso, which was seen as a turnaround specialist that bought undervalued companies. “Sears was a classic turnaround company for Carso to buy,” an analyst said at the time. “It was at the bottom of the retail cycle and losing money.”

In March, Forbes estimated Slim’s fortune at $60 billion, between Warren Buffett and Bill Gates.

In an interview on his official Web site, Slim was asked why he started buying companies during Mexico’s 1982 financial crisis.

“It all collapsed, the trust of investors, the rate of exchange, and of course, prices,” he said. “All this, led to these inexplicable, punished prices of very valuable companies that did not have financial problems.”

Much of that should sound familiar to investors in today’s market, which is characterized by a banking crisis and extremely low stock prices.

Slim on his Web site also lists his 10 business principles in talking about his Grupo Carso business. Among them are: a simple business structure with minimal hierarchies, austerity, a focus on modernization and cooperation and, number 9, “All times are good time[s] for those who know how to work and have the tools to do so.”

The souring fortunes of luxury shoppers have hurt all the high-end chains. Saks also is stuck with a cumbersome debt load, although analysts said the company could always tap the inherent value locked away in its real estate, particularly the landmark Fifth Avenue flagship.

For the quarter ended Nov. 1, Saks posted a loss of $42.8 million on a 12.3 percent drop in sales as the firm’s women’s apparel business was laid low by “widespread weakness.” The company said its spring receipts are planned down by at least 15 percent.

“It’s the toughest environment I have seen in my career,” Stephen I. Sadove, Saks’ chairman and chief executive officer, said at the time.

Asked about the company’s liquidity, Sadove said he was “very comfortable with our financial situation” with its $500 million revolving credit facility and a New York flagship that’s “unencumbered.”

Still, Saks is among the most financially pressured of the broadline retailers, said Thomas Cook, managing director and senior analyst at Citi, on a conference call last week. “Saks is now in cash burn mode,” he said. “Saks is going to be very interesting through 2009 because of the cash burn and need perhaps to actually fund the business off the revolver.”

But Cook said the company’s midtown Manhattan flagship was worth enough to cover the firm’s debts even with depressed real estate prices.

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