This is Saks Inc.’s moment in the spotlight — and a reworking of the luxury sector just might be in the offing.
This story first appeared in the May 23, 2013 issue of WWD. Subscribe Today.
Word that Saks had hired Goldman Sachs to explore a potential sale drove its stock up another 13.4 percent to $15.50 Wednesday. Traders rushed in to get a piece of the action, and more than 23 million shares changed hands, about 10 times the daily average.
There’s still a long way to go in any sale process, and Saks has not acknowledged that it is working with the investment bank.
But the interest in Saks has rekindled a long-talked-about scenario that has the retailer merging with Neiman Marcus Inc. to form a kind of superluxury retailer.
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Private equity giant Kohlberg Kravis Roberts & Co. is said to be weighing an investment in Saks with an eye toward combining the company with Neiman’s, according to Bloomberg News and others. A KKR spokeswoman declined to comment.
Neiman’s is also on the market exploring its options. The firm is owned by two other private equity groups, TPG and Warburg Pincus, which are believed to be pursuing a public offering or sale of the company to what would have to be a very large investor. The investors bought Neiman’s for $5.1 billion in 2005 and have already stuck with the company longer than expected.
Merging Saks and Neiman’s might help the combined retailer operate more efficiently and compete with their much larger rival, the $12 billion Nordstrom, but there are also questions about overlap in certain key markets and how to create serious sales and earnings growth. Such a merger could also weigh heavily on designers, who already have a limited number of high-end department stores to court.
“The leverage and buying power would be incredible,” said one men’s wear vendor about a possible combination of Saks and Neiman’s.
Another insider said that if the two retailers were to merge, fireworks would definitely erupt. “There’s so much animosity between the two companies,” he said.
Many observers saw the logic of a merger and said that operationally it was doable, and might be wise due to the growing strength of such competitors as Nordstrom.
“I don’t imagine the attorney general would get involved in this kind of merger,” said one retail veteran. “It’s too small, and Saks and Neiman’s have plenty of competition from the luxury brands, which all have stores, and from other specialty stores. The combination would be more profitable than the two stores are individually. If Saks and Neiman’s got together, they could split up the brands. There are more than enough luxury brands out there.”
The retail veteran added, “Steve Sadove and Ron Frasch have done a good job at Saks, but the problem is the stock has done nothing for years. They have got to figure out how to get value in that stock.”
Gilbert Harrison, chairman of investment banking firm Financo LLC, said, “It’s a combination that’s been rumored about in the past. Frankly, my concern is that there would be too much overlap in the market.”
Rebecca Duval, retail analyst at BlueFin Research, said, “There’s too much overlap because the two present the same merchandise. It’s hard to see where’s the benefit [for Saks]; where’s the gain.”
While a combined entity could garner sharper prices from vendors by placing larger orders, Duval said the benefit might really be more in favor of Neiman’s than Saks.
She also said that with the right marketing, Neiman’s might be able to leverage off of the Saks name since Neiman’s is not well known outside the U.S. and Saks is.
Financial sources speculated that Saks, by coming to market now, might be trying to present itself as a lower-cost alternative for buyers who might be interested in Neiman’s.
Now might also be a good time for Saks to strike. Its stock was already up 30 percent before Wednesday’s gain, and the recovering real estate market has made its portfolio of 26 owned stores all the more attractive — especially given the prime location of its Fifth Avenue flagship.
Deborah Weinswig, retail and broadlines analyst at Citi Research, said, “We first contemplated Saks as a takeover target in January 2006. In the hands of the right acquirer, we see significant opportunity for improvement…”
The analyst noted possible areas for improvement included the continued rationalization of its department stores in the U.S., accelerated expansion of its Off 5th stores, more namesake stores internationally and faster omnichannel growth.
Weinswig also presumed a $19 target price, figuring a 10 times enterprise value/earnings before interest, taxes, depreciation and amortization multiple and Citi’s 2014 EBITDA estimate of $303 million. The historical takeout average multiple is 9.4 times, according to the analyst.
One market source said a takeover of Saks “could make perfect sense,” since an acquirer with cash to invest could help the specialty chain progress faster on some of its initiatives, such as Saks’ spending on e-commerce.
If someone does make a run at Saks, financing should be relatively easy to come by.
Goldman just tested the market for debt tied to real estate and found demand to be high. The bank just closed on a $2.25 billion real estate backed loan for J.C. Penney Co. Inc., which was $500 million more than expected just last month.
“Given Goldman Sachs’ recent deal with [Penney’s], the groundwork has been laid for a department store to finance a large transaction secured by its real estate,” said Paul Trussell, an analyst at Deutsche Bank.
Matthew Boss, an analyst at J.P. Morgan, noted that Saks has lagged its peers in terms of profitability but has a healthy balance sheet and a hefty real estate portfolio. The Fifth Avenue flagship is seen as being worth more than $1 billion — nearly half the company’s current market capitalization of $2.24 billion.
Although Saks has been focusing on its omnichannel initiatives and has sped up the launch of off5th.com, the company might have already done most of what it can to focus its portfolio of stores.
“Savings from the closing of unprofitable stores…is largely in the rearview mirror,” Boss said, noting the company has shuttered 12 department stores, or 29 percent of its base, since 2007.
Some sources said that if Saks were sold, it would most likely go to a private equity group, or an overseas retailer such as Qatar Holdings, owner of Harrods. The wealthy Qatari government has been investing heavily in property and retail over the last year, including taking a stake in the French department store chain Printemps. An industry observer said Saks’ presence in the Middle East and its Fifth Avenue flagship would make it a trophy asset for a sovereign wealth fund like Qatar’s, pointing out that Saks is much better known in the region than Neiman’s.
At one time, Saks was owned by Bahrain-based Investcorp.
Hudson’s Bay Co. is another possibility. Chairman Richard Baker has in the past shown interest in Saks Fifth Avenue. “He’s a real gambler,” said a retail source, who added that Baker pulled off a great deal selling Zellers real estate in Canada to Target Corp. While it gave Target an entry into Canada, it also paid for Baker’s earlier acquisition of Hudson’s Bay. Zellers was part of Hudson’s.
While Saks would be a good complement to the Hudson’s Bay and Lord & Taylor divisions of the Toronto-based Hudson’s Bay, one financial source said, “Saks is too big for Richard to swallow right now.” Furthermore, Baker has been pumping money into renovating and reviving a lot of the floor space at Hudson’s Bay to raise productivity and bring in new retail concepts. He’s also moving to expand Lord & Taylor to some additional sites, with a store planned in Boca Raton, Fla., this fall and a recent opening of a unit in Yonkers.
Any suitor for Saks will have to contend with a crowd of deep-pocketed investors with skin in the game and long-standing interest in the company.
Southeastern Asset Management owns 19.3 percent of Saks, while Carlos Slim Helú owns 15.4 percent and Tod’s SpA chairman and chief executive officer Diego Della Valle owns 15.1 percent.
A would-be buyer could pair with one or more of these holders and pare their cost to takeover the company.