Speculation is again building among investors that Gap Inc. may be the target of an acquisition, and hedge fund billionaire Edward Lampert's name just won't go away.
Several financial sources speculated that Lampert could be looking to complete Act III. Act I was scooping up Kmart from bankruptcy. Act II was merging the troubled discount retailer with Sears, Roebuck & Co., creating Sears Holdings, in 2005. Now, some financial sources theorize that Lampert wants another acquisition. They claim Gap, Home Depot and Anheuser-Busch are among the names being considered as potential targets. Financial sources contend Gap is the most likely candidate, but other analysts dismissed that idea, pointing out that acquiring the retailer would be difficult because Gap, based in San Francisco, is tightly controlled by the Fisher family.
Lampert could not be reached for comment on Wednesday. A spokesman for Gap declined to comment.
Still, the prospects are intriguing, given Gap's stock valuation; low, long-term debt, and strong operating cash flow, which is about $1.8 billion for the trailing 12 months.
Gap Inc.'s market capitalization is about $15.9 billion. The stock has been trading around $19. The 52-week high is $21.39, and the low is $15.91. Gap has an EBITDA enterprise multiple of 7.1, which is well below industry average takeout multiples of 8.9 times pre-tax earnings. At the 7.1 multiple, the price tag on Gap Inc. is roughly $13 billion.
From Lampert's perspective, the retailer's huge cash flow could be diverted from paying dividends, making investments and doling out capital expenditures ($600 million in the most recent fiscal year) to his favorite investment: derivatives.
Lampert, who is founder of ESL Investments, was able to triple earnings at Sears Holdings, to $196 million, in the third quarter on a 2.1 percent sales decline by making investments in derivatives. Derivatives involve contracts between companies that typically are hedged or speculative. These financial instruments often involve equity, bonds or commodities.
Citigroup Global Markets analyst Kimberly Greenberger said in a report last August that Gap "does not score high as a likely privatization candidate."
Later, in a separate interview, Greenberger said, "Any potential acquirers would have to get signed off by the Fishers, who own 30 percent of the common stock. I don't think the Fishers are interested in selling Gap. They are the founding family and have historical ties that I don't think they are willing to cut."If the Fishers do decide to sell, there would be tax implications that would make it impossible for the family to leave stock to heirs, analysts said. Donald G. Fisher, chairman and founder of Gap Inc., is 77 years old.
However, Gap's 7.1 takeout multiple is attractive, financial sources said. Moreover, institutional investors own more than 58 percent of the stock, and may be interested in seeing a return on their investment that only a sale or leveraged buyout could produce, sources said.
Christine Chen, senior research analyst, Pacific Growth Equities, said every couple of months Gap buyout speculation "pops up, but a transaction is highly unlikely."
"While it is compelling, I don't think it makes sense," Chen said. "The Fisher family still has control, and is not interested in selling and has been backing up [chief executive officer Paul] Pressler."
Pressler is credited with cleaning up the retailer's operations and balance sheet, which included lowering the long-term debt load. On the merchandising front, Gap has been criticized for its fashion misses. "But I don't think a private equity fund can do any better unless they have a star merchant in their wings," Chen said.
WWD reported this week that Karyn Hillman, senior vice president of apparel merchandising for Banana Republic, was promoted to senior vice president of merchandising for the Gap Adult unit of flagship brand Gap — a position that was open for several seasons.
In his new book “Hollywood Royale,” Andy Warhol’s Protégé Matthew Rolston celebrates the Eighties revival of Hollywood glamour. Featuring more than 100 portraits taken by Rolston from 1977 to 1993, the book contains photos of icons like Michael Jackson, Cyndi Lauper, and @drewbarrymore, pictured here in 1991. “Hollywood Royale,” out today, will be accompanied by an exhibition opening at Los Angeles’ Fahey/Klein Gallery on March 1. #wwdeye
"Nowadays when life is not so happy with everything going on in the world, I think people come to me for a little bit of whimsy and color and fun." - Designer Rebecca De Ravenel on her cult-favorite jewelry line. (📸 : @vsteves) #wwd40
“Everyone is talking about how the retail industry is struggling, but I think it’s an incredible time because brands who are doing something different and innovative are setting themselves up for the future,” said @adamgoldston, who founded the luxury athletic brand @apl with his brother @ryangoldsten. The Goldston’s are part of WWD’s 40 under 40: a group of industry notables. See the rest of the list on WWD.com. (📷: @vsteves) #wwd40
@eyeswoon blogger Athena Calderone debuted her first-ever cookbook, “Cook Beautiful,” which is heavily centered on the presentation and visual expression of food. Pictured here are her miso glazed carrots from the book. Get the recipe on WWD.com. (📷: @johnny_miller_) #wwdeye
“It’s passion that helps get anybody to a certain point and it’s what’s propelled me,” said Kith founder @ronniefieg, one of WWD’s 40 under 40: a group of industry notables who are changing the face of retail, fashion and beauty. Fieg, who opened a Manhattan flagship on October 7, began his career at age 13 as a stock boy and salesman for footwear chain David Z. “I think staying true to [my] beliefs, hard work and passion have gotten me to where [Kith] is today.” See the rest of the 40 at WWD.com. (📷: @vsteves) #wwd40
25-year-old @samweaving is about to break out this fall, starring in Netflix’s horror film “The Babysitter,” fittingly out today on Friday the 13th. That’s not the only place you’ll be seeing her, though — Weaving’s got a role Showtime’s “SMILF” and another alongside Frances McDormand and Woody Harrelson in “Three Billboards Outside Ebbing, Missouri.” Though she’s got a full plate at the moment, there’s one role she’s got her eye on: Marilyn Monroe. “I’m a little too young at the moment, but it’s on my bucket list,” the actress told WWD (📷: @dandoperalski) #wwdeye
BFF's Poppy Jamie and Suki Waterhouse celebrated the launch of their bag line Pop x Suki at Nordstrom last night. "The line is really about our friendship, and how we are so different but complement each other," said Waterhouse. 👯 (📷: Katie Jones) #wwdeye
After designing the new @louisvuitton and @bulgariofficial flagships and a @chanelofficial boutique opening in Japan, @petermarinoarchitect has another project on his plate: The Lobster Club. Located in the Seagram Building, it’s the famed architect’s first restaurant project in New York, serving up modern Japanese brasserie-style cuisine. Bronze hues, bespoke material detailing, blush and chartreuse tones and a heavy emphasis on Picasso can be seen throughout. Mark your calendars for Nov. 1 for the much-anticipated opening. (📷: @clint_spaulding) #wwdeye
Did you know: @carlychaikin of "Mr. Robot" has been painting for about a decade? The actress, who plays Darlene on the show, is a self-taught artist who lists Salvador Dalí and Chuck Close as some of her idols. Chaikin told WWD that painting is a form of meditation for her — A much-needed one given the intensity of "Mr. Robot." See a piece Chaikin is working on at WWD.com (📷: @jilliansollazzo) #wwdeye