By  on March 23, 2006

NEW YORK — There's a fresh "for sale" sign hanging on Jones Apparel Group's door, and two aggressive private equity firms seem to be the ones knocking the loudest.

Although no bidding has occurred, Texas Pacific Group and Cerberus Capital Management — which own, respectively, Neiman Marcus Group and Mervyns — already are said to be in discussions with Jones, according to several investment bankers and some private equity contacts. Those talks could lead to either firm making a separate offer for Jones, owner of Barneys New York, or to a joint bid for the $5 billion apparel firm.

Observers say Jones is looking for at least $40 a share, which would value the group at $4.56 billion, and that a deal could be concluded within six weeks. After soaring 13 percent on Tuesday, shares of Jones Apparel Group closed at $34.59, down 25 cents, in trading Wednesday.

Cerberus, which owns Mervyns, Rafaella Sportswear and Fila, is said to be "seriously in pursuit" of Jones, according to financial sources. An acquisition by TPG, which owns J. Crew as well as Neiman Marcus, might result in the creation of a mega luxury and specialty retailer, one that would redefine the high-end channel.

Executives at Jones declined comment, as did a spokeswoman for Texas Pacific Group. A spokesman for Cerberus did not return a request for comment by press time.

Industry contacts and investment bankers said VF Corp. was one of the firms that turned down a merger proposal floated by Jones chief executive officer Peter Boneparth. That led Boneparth to seek a buyer in the private equity sector.

Boneparth is said to have also contacted Bain Capital. Blackstone, which some market observers said had been interested, is now said not to be looking at Jones.

Gilbert Harrison, founder and chairman of investment banking firm Financo, said, "The merger and acquisition environment is extremely attractive. However, this is a transaction that will represent over $5 billion in enterprise value....There is a likelihood that two or more private equity funds will join together to buy the company with management in place."

A purchase by TPG, even in a joint bid with Cerberus, would give TPG both Neiman Marcus, which it acquired jointly with Warburg Pincus last year, and Barneys New York.Neiman Marcus, according to chairman and chief executive Burt Tansky in a conference call to Wall Street earlier this month, when the company announced second-quarter earnings, does not consider Barneys a direct competitor. He told analysts that his company has "a very different mix of customer base than they do, especially out of town in the Neiman stores, and so does Bergdorf [Goodman]. And we've been operating very well in California against them in Beverly Hills. So we think we are in a very good position to face that new rollout."

Still, Barneys is considered an "attractive business to any of a number of prospective buyers," noted Jeffrey Edelman, analyst at UBS.

While Jones said it was looking to sell the entire company and not its parts separately, a financial buyer is expected to split up the footwear, apparel and Barneys operations at some point, according to private equity sources and investment bankers.

Brad Stephens, analyst at Morgan Keegan, observed, "In my opinion, the sum of the parts is greater than the whole in a case like this. If you sell the company whole, [the likelihood is] someone comes in and then splits up the company. This is not an easy business to be in right now. You've got retail consolidation, proliferation of private label product, direct sourcing and retailers ordering less up front and doing more with niche brands to drive traffic. For a company to do all three together — footwear, apparel and luxury retail — is not the best way to realize the ultimate value of the company."

While Jones could still decide against selling, Lizabeth Dunn, analyst at Prudential Equity Group, wrote in a research note, "We can't argue that it's a great time to be a seller. There appears to be significant financial buyer interest in the consumer sector currently."

She noted that there is a "solid operating margin turn opportunity, and we believe taking the company out of the spotlight of the public markets could help management expedite necessary changes to drive profitability. Jones has strong free-cash flow, which financial buyers typically look for."

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