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Barneys Gets New Owner in Perry Capital

Debt-for-equity swap cleans up the retailer's balance sheet and gives the equity fund a majority stake.

The new deal will reduce Barneys' long-term debt from $590 million to $50 million.

NEW YORK — Barneys New York once again has a new owner — Perry Capital.

This story first appeared in the May 8, 2012 issue of WWD.  Subscribe Today.

In a debt-for-equity swap cleaning up the balance sheet, Barneys has reached an agreement with its largest lender, Perry Capital, as well as The Yucaipa Cos., another key lender, and its current owner, Istithmar World, to significantly reduce its long-term debt from $590 million to $50 million. Perry Capital, run by Richard Perry, now becomes the majority owner of Barneys.

The deal was first reported Monday afternoon on WWD.com.

After the deal was disclosed, Barneys’ chief executive officer, Mark Lee, and Perry, its new chairman, said the transaction gives the store newfound financial flexibility to grow the business, accelerate long-overdue renovations and traffic in the stores and online, as well as ease worries about the looming debt coming due in the next few years that was creating jitters in the banking circles. Perry, a shrewd investor, helped finance Istithmar’s acquisition of Barneys from The Jones Group in 2007 for $942.3 million. Istithmar has been suffering its own problems, selling off assets, and has on and off tried to sell Barneys.

The transaction should put to rest persistent rumors that, in its highly leveraged state, Barneys could be on a path to bankruptcy, even though the company has been meeting its obligations to vendors and factors and has apparently been lifted by the recovery in the stock market and the rebounding luxury market.

The deal also should enable Lee to focus on growing the business with the new team he assembled when he joined the retailer two years ago after previously heading Gucci. Lee hired Daniella Vitale as chief merchant, Dennis Freedman as creative director and Amanda Brooks as fashion director, although she recently departed, and the group has had some success in reigniting some buzz around Barneys.

Officials emphasized to WWD that Barneys’ operations are strong, but acknowledged the burden the debt placed upon it. “This agreement really puts the balance sheet in a very good condition to match our strong operational performance,” Lee told WWD. “The debt relates to the 2007 acquisition. We’ve been heavily leveraged since then. With only $50 million in debt left, we have huge financial flexibility to execute and accelerate our strategy. From an operational point of view, we have been very strong. We grew revenues by double digits and profits [earnings before interest, taxes, depreciation and amortization] by 40 percent.”

With Perry, the majority owner, Istithmar and Yucaipa retain minority stakes. Executives declined to reveal the exact breakdown of ownership.

A new board will be created at Barneys. Perry will be its chairman and Perry Capital will have three additional seats on the board. Lee is also on the board. In addition, Yucaipa and Istithmar will each have a seat, for a total of seven. “The board very much reflects the consensual and cooperative way this transaction was accomplished,” Lee said.

Perry, when asked if he would play an active role in the company, responded: “My responsibility is to support Mark and his management team, and to make sure we give him the capital necessary to create his vision, which is really exciting.” He stated that he would not have an operational or executive role. “I expect to be helpful and involved and to give Mark all the additional input he might want and need and to be his partner.”

Barneys still has to renegotiate a revolving credit agreement, though Perry said, “That’s kind of a nonissue at this point.” The revolver, he added, has been paid down “dramatically” and was more than supported by working capital. “There are a lot of people who would be part of the revolver. This is not a significant deterrent or liability for the company,” he said.

Lee added that the increase in free cash flow “allows us to invest in the business and begin long-overdue renovations,” including continuing work already begun at the Madison Avenue flagship by 60th Street in New York. Lee said the ground floor will be complete by the end of the summer, and a new shoe floor will be unveiled on the fifth level in the summer, among other changes.

Lee also said Barneys is planning for major renovations at the Beverly Hills flagship, considered the luxury chain’s second most important store, where so far there have only recently been some “minor” upgrades. Barneys also has what it considers flagships in Chicago, Seattle, Boston, Dallas, San Francisco, Las Vegas and Scottsdale, Ariz. In addition, barneys.com is being redesigned and will be relaunched in a matter of weeks.

Despite Barneys executives consistently stating that its operations are healthy and business has been strong recently, the store continues to be dogged by speculation that the Dallas, Scottsdale, San Francisco and Las Vegas units have not performed as well as the longer-standing locations on Madison Avenue, in Beverly Hills and Seattle, as well as Chicago. Many Co-op units, which are smaller shops specializing in contemporary styles and denims, were also opened in the past decade with mixed success.

However, Lee said no Barneys New York stores are closing when asked if that was a possibility.

“We have closed a few Co-ops,” Lee acknowledged, while also noting the company regularly reviews store performances and leases. Regarding the Co-op closings, Lee said, “There’s no big news there.”

Asked again to respond to speculation about some stores lacking traffic, Lee said it’s best to look at the store portfolio overall, stressing, “What matters is the end result of the [entire] company.”

Perry took a slightly different perspective, saying, “It would not surprise me if we were not hitting on all cylinders at all times.…If you look at the economics of the United States, certain cities are doing extremely well and certain cities have not recovered yet” from the recession.

“There’s no debt on the company now,” Perry said. “The company is going to grow. There is a long, long runway for this company to operate really successfully. All the partners got together and eliminated the debt. That was really the problem. That was the real fear. Other than that, things have been very, very good.”

Longer term, Barneys will have to grapple with some serious real estate issues. The luxury retailer has been coasting with cheap rents at its Madison Avenue and Beverly Hills flagships ever since it emerged from bankruptcy in 1999 and commenced a 20-year lease. It has renewal options beginning in 2019, but that’s when the rents are subject to market rate adjustments and could skyrocket. Barneys declined to discuss those rent issues.

Barneys was founded as a bargain basement men’s retailer in 1923 in downtown Manhattan but became an international arbiter of high style in the Seventies, around the time it started carrying women’s apparel in addition to the men’s wear. The merchandising innovation was led by the late Fred Pressman, the son of the founder, Barney Pressman.

In the mid-Nineties, an ill-conceived expansion strategy and mismanagement drove the business into bankruptcy and, since emerging from Chapter 11, the luxury retailer has struggled with changing ownerships, and an appeal that is considered too luxurious and narrow for some of the cities to which it expanded. It also had a strange, two-year run operating without a ceo from the time Howard Socol quit in 2008 until Lee took the reins in 2010.

ABOUT RICHARD C. PERRY

• Married to designer Lisa Perry.
• Patron of Pop Art.
• Worked in equity arbitrage at Goldman, Sachs & Co.
• Chief executive officer of Perry Capital, which he cofounded in 1988.
• Served as a director of Sears Holdings Corp. from September 2005 to May 2009.
• Investor in fashion factor Capital Business Credit.
• On the University of Pennsylvania’s board of trustees along with William Lauder and Michael Kowalski.
• Was an adjunct associate professor at the Stern School of Business at New York University.