By  on May 8, 2006

NEW YORK — The price to buy Lord & Taylor has been set and it's a steep one: $1.2 billion, to be exact.

While the price to buy the department store chain from its parent Federated Department Stores Inc. is within Wall Street's valuation range of Lord & Taylor's real estate, some observers, including one private equity executive, believe the asking price may be too high.

Federated put the 49-unit Lord & Taylor on the block in January after deciding the retailer didn't fit into its strategy to build up its Macy's and Bloomingdale's nameplates into more powerful national brands. The group acquired Lord & Taylor last year through its $17 billion purchase of May Department Stores.

Federated is asking $1.2 billion for the Lord & Taylor operation, according to a financial source who has seen the book. The business had sales of $1.56 billion in 2005 under the leadership of Jane Elfers, president and chief executive officer, who has been trying to revive growth at the company.

A spokesman for Federated declined comment on the asking price, but said the company still expects to complete its divestiture of Lord & Taylor by the end of 2006.

Deborah Weinswig, retail analyst at Citigroup Global Markets, said most of the value of Lord & Taylor is in its New York flagship on Fifth Avenue at 38th Street. "The flagship is about 611,000 square feet, which we estimate has a value of $611 million at $1,000 a square foot, excluding air rights. The real estate value for the remaining Lord & Taylor stores is $509.9 million," she said.

Weinswig believes the value of the real estate alone could be about $1.12 billion. Presuming a tax rate of 37.7 percent, Federated would net $698.3 million on an after-tax basis, according to the analyst's estimates.

Adding in the value of both the Lord & Taylor business and the air rights to the flagship could possibly push the purchase price higher and closer to the $1.2 billion being sought by Federated, observers said.

Industry sources with expertise in real estate said those air rights, which Federated owns, could be valued as high as $700 million. Another financial source said that because the site does not have landmark status, a developer could take over the site and convert it to a hotel/condominium, with a retail space component on the ground floor.

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