By and  on April 15, 2005

NEW YORK — Splitting up its department store group, Saks Inc. is said to be close to an agreement to sell Proffitt’s and McRae’s to Belk Inc.

People with knowledge of the situation said a tentative accord was reached earlier this week, though a purchase price could not be immediately determined. Saks is publicly held and would be required to disclose the sale when an agreement is completed and signed. Belk, based in Charlotte, N.C., is the largest privately held U.S. department store company.

An announcement is anticipated within the next week, perhaps as soon as today, financial and real estate sources said. Belk is said to have been eyeing Proffitt’s for quite some time. More recently, it began looking at McRae’s and Saks’ Parisian division, real estate sources in the department store sector said.

Neither Saks Inc. vice chairman Steve Sadove nor a Belk official would comment.

A deal for Proffitt’s and McRae’s would expand Belk’s retail influence in the Southeastern states where it already operates. Parisian, while considered the better name within the Saks department store group, has units in both the Southeast and the Midwest. A Belk acquisition of Parisian, however, would move Belk into the Midwest, a move that some real estate sources said didn’t appear to be in the cards.

Belk posted an 11.3 percent increase in net income to $124.1 million and an 8 percent boost in sales to $2.45 billion for the year ended Jan. 29. This compares with net income of $111.5 million on sales of $2.25 billion in the previous year. Belk opened 14 stores in 2004, adding 964,300 square feet, and completed eight renovations and three expansions.

Many people in investment banking, hedge fund and credit markets had expected a push by Saks for the sale of its entire department store group, and had placed a valuation of $2 billion to $2.5 billion for the entire operation. Saks has been looking for a buyer for the department store operation since January. Saks’ sale of Proffitt’s would represent the first step in an unraveling of the nameplates that Proffit’s Inc. built before it acquired Saks Holdings Inc. in September 1998. That purchase resulted in Proffitt’s changing its corporate name to Saks Inc. In addition to Proffitt’s, McRae’s and Parisian, the department store division includes the nameplates Bergner’s, Boston Store, Carson Pirie Scott, Club Libby Lu, Herberger’s and Younkers.A piecemeal sale of the nameplates would raise several questions: Does this mean Saks already has buyers lined up for the other nameplates? Is the rest of the department store group going to be sold by store location, with the ones not sold being closed? Might Saks elect to keep some nameplates, such as Parisian and Club Libby Lu?

One credit source who has been keeping tabs on Saks noted that there may be a paucity of buyers for some of the remaining nameplates, particularly since those stores are in localized markets.

“I’m not sure who would want Carson Pirie Scott in Chicago,’’ he said. “The same is true of Bergner’s in Illinois and Boston Store in Wisconsin.”

There also could be another wrinkle to the sale of the remaining stores, one that would impact both valuation and the dollars that eventually would be added to Saks’ coffers in the event of a sale.

The department store group operates stores in tertiary markets, sometimes referred to as C and/or D locations. The widely circulated valuation among financial circles is that those C and D locations are worth about $70 to $75 a square foot. Some real estate professionals dispute that figure, judging the value to be more in the range of $30 to $35 a square foot.

To be sure, real estate professionals paid by retailers for their help in acquiring new store sites are likely to lower valuations to push down the purchase price. And sellers, oftentimes more hopeful than realistic, ask for the higher price thinking that maybe a bidding war might push the dollar amount even higher.

Yet others who have looked more dispassionately at the sites — they know the market place and are consulting with retailers on projects, but not in connection with a purchase of the Saks nameplates — also have noted that many of the stores are “so-so” and that they wouldn’t be worth the “capital expenditures” needed to upgrade them.

When Proffitt’s and Saks Holdings merged in 1998, there were concerns over expectations regarding a savings of $60 million to $80 million over a two-year period after the merger from synergies in MIS, logistics, finance and transportation. And the pitch from both camps to shareholders was that the then-$3.5 billion Proffitt’s and the $2.5 billion Saks Holdings would create a moderate-to-upscale retail powerhouse.When the deal was announced in July 1998, Proffitt’s was trading around $40 a share, while Saks Holdings was trading in the $29 range. In September of the same year, just before the merger went into effect, shares of Proffitt’s traded around $25 and Saks closed in the $23 range.

Fast-forward to 2005, Saks Inc. is trading on the Big Board near its 52-week high of $19.27, compared with its 52-week low of $11.61. Shares of Saks closed on Thursday at $18.84, up 26 cents, with almost 3.8 million shares changing hands versus a three-month average trading volume of nearly 1.5 million.

As for the intervening years, Citigroup Global Markets analyst Deborah Weinswig wrote in a research note on “Roadmap to Retail Deals” dated April 13: “Although the original merger had been intended to upgrade Proffitt’s portfolio of department stores, not only were the stores not upgraded, synergies and cost savings were also not realized as a result of the merger.”

Saks in July 2000 had contemplated a spin-off of Saks Fifth Avenue. That was never accomplished because of recessionary issues and concern over bondholder reaction regarding possible allocation of debt.

In the last year, a new management team was named to head up the SFA division, which last month unveiled a luxury battle plan that emphasizes shoppers’ needs as the linchpin in redefining Saks’ retail image.

Store locations
Boston Store
Carson Pirie Scott
Club Libby Lu
Saks Fifth Avenue Enterprises
Saks Fifth Avenue
Saks Off Fifth
Source: Saks Inc. Web site. compiled by Amy S. Choi

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