By  on February 11, 2008

A bid for Saks Inc. by Baugur Group remains in a holding pattern as the two firms "continue discussions" while the retailer's top-level executives are said to be looking for a piece of the action.

But as Baugur waits — sources said the company continues its due diligence — the rumbles of a possible bid have investors quietly buying up Saks shares.

Meanwhile, all eyes are on Saks' quarterly and year-end results, which are due March 5. Financial sources say those numbers could be a key mover in the run-up to any bid — but they're also pondering how an offer might be structured.

Most sources familiar with the companies said they expect Baugur to buy Saks outright. However, a few believe Baugur might take a majority stake, allowing the retailer's management, led by chief executive officer Stephen I. Sadove, to take a minority stake in the business with the two working as partners.

The deal could be similar to one Baugur just wrapped up with Jane Shepherdson. Late last month, Baugur joined forces with Shepherdson, former brand director of Topshop, and her management team to spin contemporary fashion retailer Whistles off into a separate company through a management buy-in deal.

Whistles had been owned by Baugur through its holding company, Mosaic Fashions, since 2004 when it was acquired from the founders. Shepherdson teamed up with Baugur and Iceland's Glitnir Bank to spin off the retail chain. Baugur is still the largest shareholder in Whistles. Shepherdson will serve as the new company's ceo. Financial terms of the deal were not made public.

A Saks spokeswoman declined comment on a possible bid, saying it was "against our policy to comment on rumors or speculation."

One analyst said Saks' current management wants to stay on, and the managers believe progress is being made at the company. During the third quarter ended Nov. 3, Saks' profits shot up almost 250 percent to $21.6 million on a 14.2 percent boost in sales to $796.1 million.

From an operational standpoint, Citigroup Global Markets retail analyst Deborah Weinswig said, "The big issue right now is buying inventory to match the level of sales. The company is overinventoried, and will continue to see gross margins pressured so long as it remains overinventoried."Weinswig said Saks had a great January compared with some of its competitors. "Neiman Marcus had a 3.3 percent comps gain, but it pulled a promotion forward from February comps. Nordstrom was shockingly weak. Saks had a 4.1 percent same-store sales increase. Outside of the warehouse clubs such as Costco, Saks had the best numbers," Weinswig said.

Weinswig gave Saks a thumbs up Friday in a research note. "Our top pick is [Saks] based on our increased conviction that turnaround initiatives are gaining traction and paving the way to greater profitability," Weinswig wrote. "We also believe there is a high likelihood of the company being taken out in early 2008."

Regarding the performance of Saks' stock, the attention given by Baugur has done little to buoy the share price, which works to Baugur's advantage.

WWD reported Oct. 17 that Baugur had eyes for Saks and that executives from the Icelandic investment firm had met with the retailer's management. Baugur confirmed the report in an Oct. 29 Securities and Exchange Commission filing and said it might team up with Milestone Resources Group Ltd. for a joint bid.

Since Oct. 17, however, Saks' stock has fallen 11.9 percent as the S&P Retail Index slid 13.6 percent.

Last Thursday, shares of Saks jumped 8.7 percent to $17.67, with 3.7 million shares trading hands. Over the past three months, the stock has closed as high as $22 and as low as $15.09, with an average of volume of 2.4 million shares.

Saks has an enterprise value of $2.84 billion and a market capitalization of $2.5 billion.

Baugur owns 12.2 million shares of Saks, or 8.5 percent, and Milestone, an investment vehicle of Dubai-owned Landmark Group, owns another 1.7 million shares, or 1.2 percent of the firm.

Meanwhile, Saks' depressed share price is attracting other investors. Last month, Jennison Associates LLC, an affiliate of Prudential Financial Inc., said in an SEC filing that it had amassed 15.5 million Saks shares, or 10.9 percent of the retailer. That marks an increasing interest in Saks on the part of Jennison, which had a 7.9 percent stake in the company in May. It is not known when Jennison stepped in and starting buying additional shares of the retailer.Others with deep pockets also are seeing value in Saks' stock. Marsico Capital Management reported to the SEC Friday that, by the end of January, it had upped its stake in the retailer to 23.2 million shares, or 16.4 percent of those outstanding. The fund held 10.4 percent of the firm a year earlier.

The incremental investment strategy is one that is being seen across the entire market. Private equity firms and hedge funds have switched gears from making leveraged buyouts (that stack the acquired company's balance sheet with borrowed debt) to taking straight stock positions in public companies.

As a result, data from FactSet Mergerstat shows a clear deceleration of M&A activity. In 2007, the total number of retail and apparel transactions was 349, which is well below 2006's 421 deals.

Should negotiations for Saks take longer than expected, there's the chance another bidder might come in and try to snap up the company. One name that came up again is NRDC Equity Partners.

NRDC, owner of Lord & Taylor and Creative Design Studio, has in the past expressed interest in purchasing Saks. However, informed sources say it's a dead issue as of now with little hope talks could revive in the near future. "There's no money out there," said a source.

Another source said he believes NRDC considers Saks too expensive. NRDC is also close to closing a deal to buy Fortunoff, which has declared bankruptcy. NRDC has formed NRDC Acquisition Corp. to raise $360 million for the possible purchase of one or more operating companies.

Aside from Lord & Taylor, NRDC is looking at several smaller deals, recently purchasing the Peter Som Inc. designer business and seeking further acquisitions in the fashion and retail industries.

An analyst on the sell side said it made more sense for Baugur to own Saks than a U.S.-based private equity firm such as NRDC because "Baugur can takes and make it a global brand. One can look at House of Fraser as the playbook that is already in place."

In addition, given the weakness of the dollar against the euro, a takeover of Saks by an overseas firm is seen as more likely than by a U.S. entity, observers said. Baugur could raise the funds to buy Saks in European markets, making a dollar-denominated takeover a relative bargain.

— With contributions from Evan Clark, David Moin and Arthur Zaczkiewicz

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