As Kohlberg Kravis & Roberts is set to launch its initial public offering, the private equity giant is said to be looking to make a big splash by acquiring Macy's Inc.
Sources said KKR partnered with Goldman Sachs on an offer for the $27 billion retailer valued at $52 a share, or about $24 billion, which may or may not exclude Macy's debt.
Private equity sources said an agreement in principle could be within days of getting completed. The financial sources said principals involved had expected a deal to be signed last weekend, but others indicated there were details that needed to be ironed out. Sources also believe that the parties are trying to get a deal done before Monday, the scheduled date for a series of investor meetings planned by Macy's management.
A value for the potential deal could not be ascertained due to uncertainty over how much debt Macy's currently has on its books. According to private equity sources, KKR is keen on inking a deal as a way to help sell shares of its planned IPO later this year. Should a deal come to fruition, it is believed KKR would keep current Macy's management in place, including chairman and chief executive officer Terry Lundgren, the architect of the current configuration of the department store giant.
From an investor's standpoint, Macy's is attractive because it generates cash, owns 54 percent of its real estate, and is one of the most famous retail brands in the world, with a rich heritage.
And while the proposed transaction could still fall apart, sources said they believe the parties could reach an agreement shortly. The Principal Investment Area, Goldman's private equity arm, is believed to be participating in the negotiations, as is its real estate group.
A spokesman for Macy's declined comment, as did respective spokesmen for Goldman Sachs and KKR.
There's still some doubt in the industry and among those on Wall Street regarding whether the management of Macy's, formerly known as Federated Department Stores Inc., would willingly venture into a leveraged buyout situation.
Walter Loeb, retail consultant and former Wall Street retail analyst, observed, "I think there is something going on, but I don't think it will come to fruition because management would like to stay independent."Loeb was referring to the general belief in the industry that management would not want to put themselves into an LBO scenario because of the disaster that resulted in January 1990 when Federated Department Stores filed for Chapter 11 bankruptcy protection. The filing was necessitated due to the company's debt levels following the acquisition of Federated in 1988 by Campeau Corp. The company reorganized more than $8 billion of debt during its restructuring. The company emerged from bankruptcy in 1992.
Also in 1992, R.H. Macy & Co., which had purchased the Federated divisions of Bullock's and I. Magnin stores from Campeau, itself fell on hard times and filed for Chapter 11 bankruptcy court protection early in the year. In December 1994, Federated acquired R.H. Macy as part of Macy's reorganization plan.
However, since over 95 percent of the company is held by institutional investors such as AXA and FMR Corp., an LBO could be welcomed — if the price is right. The said $52 offer represents a 30 percent premium over the current trading price of the stock. Shares of Macy's closed on Tuesday at $40.03, down 0.3 percent, in trading on the New York Stock Exchange. Since June 22 when rumblings first surfaced that Macy's might be an LBO target, shares of Macy's have a daily trading volume average of 6 million.
Christine Augustine, retail analyst at Bear Stearns, wrote in a research note in late June that a leveraged buyout in the low $50s is "feasible," according to her LBO model for Macy's. But she too noted in her report, "In our opinion, the current management team (many of whom lived through the [Federated] LBO in the late 1980s and the subsequent bankruptcy) would not be in favor of this type of transaction."
Augustine said a buyout might be tempting this time because the turnaround at former May stores has taken longer than expected and that an LBO would allow the company to "execute the turnaround out of the public eye."
Loeb acknowledged that an offer at a high premium would have to be considered due to fiduciary responsibilities to shareholders. Loeb also said as the retailer's merger with The May Department Stores Co. isn't going as smoothly as planned, in addition to Macy's ongoing home department issues, a buyout might be welcomed by the company.In the firm's most recent quarterly report, Lundgren said, sales in the quarter "were soft, particularly in April. For the quarter as a whole, we were pleased with sales in the legacy Macy's and Bloomingdale's stores. However, sales in the new Macy's locations were disappointing in the quarter. In spite of weak sales, we achieved strong gross margin results and reduction in expense as a percent to sales. We are on track to deliver at least $450 million in annual expense savings as a result of the May Company acquisition," which took place two years ago and led to the conversion of 400 former May doors to Macy's last September. Macy's operates about 850 stores.
Charles Grom, retail analyst at J.P. Morgan, on Tuesday kept his "neutral" rating on Macy's, but lowered earnings per share estimates for the retailer. He noted, "Lackluster sales has triggered a domino effect on the [Macy's] model involving increased markdowns, greater promotional spending and the inability to leverage fixed costs."
Citigroup analyst Deborah Weinswig wrote in her note that an LBO of Macy's makes sense due to the retailer's strong cash flow and real estate portfolio. Macy's fully owns 54 percent of its real estate for both land and buildings, while another 14 percent are owned buildings on leased property, she wrote in her report.
Sources say that there's been an under-the-radar process for several months as Goldman Sachs bankers put out feelers to see if there was any interest in a Macy's deal. They also said other private equity firms have looked, but many have gone on to other deals. One name that reportedly eyed Macy's was private equity firm Blackstone Group, which went on earlier this month to buy Hilton Hotels Corp. for $26 billion in an all-cash deal, which represented a 40 percent premium to the closing price of shares of Hilton the day before the deal was announced.
Another reason KKR might be keen on completing a Macy's deal is its planned IPO, which many believe has a late August or early September time frame. Several sources say KKR has been keenly eyeing the retail and apparel sector for some time. Last year it almost inked a deal to buy Foot Locker Inc., and this year had put out feelers to the management team at Sketchers to ascertain their openness to an acquisition.KKR completed two big deals earlier this month. The first is the $7.1 billion acquisition, along with Clayton, Dubilier & Rice Inc., for U.S. Foodservice, the second largest broadline foodservice distributor in the U.S., from Royal Ahold NV. KKR also earlier this month completed the $7.3 billion transaction for Dollar General Corp., which it did along with GS Capital Partners, an affiliate of Goldman Sachs, Citi Private Equity, and other equity co-investors.
And while the financing markets seem to be tightening up a bit, that wouldn't bar a deal getting done for Macy's, should an agreement be reached, sources said.
The same sources noted that due to Macy's huge real estate portfolio, financing could be accomplished throughout the commercial mortgage backed securities market. Accessing the CMBS market would mean Macy's real estate would serve as collateral for any financing obtained.
Macy's By The Numbers
Macy's Top Institutional Holders
27.4 million shares
22.9 million shares
Dodge & Cox
21.9 million shares
State Street Corp.
18.6 million shares
Barclays Global Investors
16.4 million shares
Massachusetts Financial Services Co.
16.4 million shares
Wellington Management Co. LLP
15.5 million shares
15 million shares
Vanguard Group Inc.
14.3 million shares
Jennison Associates LLC
13.7 million shares
Number of insitutional shareholders: 572 Percent ownership of institutional shareholders: 95.61% Dollar value of institutional ownership: $17.64 billion SOURCE: COMPANY REPORTS, EDGARPRO
The annual Veuve Clicquot Polo Classic in Pacific Palisades this weekend drew Kate Hudson, Tracee Ellis Ross, Laura Dern and more. See pictures of the star-studded event on WWD.com. (📷: @chelsealaurenla) #wwdeye
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