Ares and CPPIB to Acquire Neiman Marcus for $6B

New owners are willing to pump in “meaningful capital” as the retailer ventures further into the omnichannel future and weighs global strategic options.

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The clock has been reset at the Neiman Marcus Group.

This story first appeared in the September 10, 2013 issue of WWD.  Subscribe Today.

The luxe chain is getting a new lease on life and new owners willing to pump in “meaningful capital” as it ventures further into the omnichannel future and weighs global strategic options. But the $6 billion deal to be acquired by Ares Management LLC and the Canada Pension Plan Investment Board means Neiman’s might have to carry more debt and face another sale or initial public offering down the road.

For now, David Kaplan, senior partner and cohead of the private equity group at Ares, told WWD that there are plans to put more money into the retailer for the next five years and that the new owners would be in lockstep with Neiman’s president and chief executive officer Karen Katz.

“We are partnering with Karen and her team,” Kaplan said during a joint interview with Katz. “We plan to operate this as a business — not as a financial engineering experience. That is not at all what we do. We are very focused on the top line and growing this company, its top line and its cash. This is not about taking real estate, flipping it, changing it. That’s not what we’re about. We have a very long-term approach.”

RELATED STORY: Neiman Marcus Sale Talk Heats Up >>

Kaplan, who is chairman of 99 Cents Only Stores and has a long history of investing in the retail and consumer space, offered few specifics on Neiman’s future. But he did say the new owners would be investing in the stores as well as technology and other initiatives “that would help continue to elevate and keep the Neiman Marcus and Bergdorf Goodman brands where they belong — which is at the pinnacle of the luxury pyramid.”

Kaplan said the company was known around the globe and that although there are no specific plans, “there probably are opportunities to grow internationally.”

Ares and the pension plan are putting “a significant amount of capital” into the deal, which is slated to close in the fourth quarter. It’s not clear how much of the purchase price will be paid with new debt. Prior to the deal, Neiman’s had debt of $3.39 billion.

A financial source familiar with the deal and the players described Ares as “financial investors” who had a very successful investment in GNC, but “don’t really know the apparel business.” The firm has also invested in Floor & Decor, House of Blues, Maidenform Brands, Samsonite, Serta, Simmons, Smart & Final and 99 Cents Only Stores.

“They pay up for good businesses,” the source said. “What Ares is paying is difficult to understand frankly, but it is what it is and they wanted to do a big deal. There was a big drop-off between what Ares was going to pay and what everyone else was going to pay.”

There were other parties interested in Neiman’s this year, including Holt Renfrew, CVC and Saks Inc., which was working with KKR & Co. to buy the Dallas-based retailer and create a much larger group focused on luxury. The Saks talks broke down over price, which, as reported, was said to be close to $6 billion.

One banker said of Ares, “They’re nice guys, but they haven’t done a ton here of scale, so it’s really hard to see where things may end up. [Neiman’s] is a good asset. It’s not like it’s a layup, but it’s relatively low risk.”

Despite some concerns about where the luxe department store, which has more or less saturated its home market, can find additional growth, the investment has several things going for it.

Saks is just about to be acquired by Hudson’s Bay Co., which leaves a key competitor dealing with a possible change in management as well as turmoil related to its integration into another company. And some Saks stores might be converted to Lord & Taylor’s, potentially clearing the field for Neiman’s in certain markets.

RELATED STORY: Neiman Marcus Vendors Mostly Upbeat on Changes >>

The buyers can also get a good deal of inexpensive financing today and benefit from inflation down the road.

Ares and the pension plan will have matching stakes in Neiman’s and will together control most of the firm. Management currently owns a small portion of the company and will continue to hold a stake. The exact percentages were not revealed.

The deal was struck early Monday morning after an all-night session and marks the end of a long road for TPG and Warburg Pincus, which bought Neiman’s for $5.1 billion in 2005.

TPG and Warburg bought into a robust and expanding luxury market, but ran headlong into recession and financial crisis. The private equity firms ended up holding on to Neiman’s for far longer than expected and had also filed for an IPO earlier this year in case a buyer never materialized.

Observers saw the sale as a decent, if delayed, exit for TPG and Warburg, which last year also took a special dividend of nearly $450 million out of the retailer.

Like TPG and Warburg, Neiman’s future owners are also betting on an overall improving trend in luxury.

Kaplan said, “If you take a long-term perspective, and certainly there are always bumps along the road, but if you take a five- to 10-year perspective, the global luxury goods market is going to have some fairly robust growth and our view is that where Neiman Marcus Group sits today in the market, its positioning, the relevancy of the brand and the channel of distribution to the consumer, that it is well positioned to participate in that macro growth.”

He also said Neiman’s has the opportunity to take share as the omnichannel business model becomes more refined across the marketplace and at Neiman’s.

In the regulatory filing for its IPO, Neiman’s cited Euromonitor research showing that the global luxury goods market expanded at a compounded annual growth rate of 4.2 percent since 2005 and was set to perk up. “The global luxury goods industry is expected to grow from $302 billion in 2012 to $427 billion in 2017, representing a compounded annual growth rate of 7.2 percent,” the company said.

For the 12 months ended April 27, Neiman’s revenues gained 6.5 percent to $4.5 billion and boiled down to adjusted earnings before interest, taxes, depreciation and amortization of $623 million. That puts the purchase price at an EBITDA multiple of 9.6 times. That compares with the 10.4-times multiple HBC paid for Saks, although analysts said post-synergies, the multiple was closer to 7.6 times. Sources said both multiples would be reduced further factoring in the value of real estate assets — Neiman’s to 8.5 times and Saks, which owns much more of its real estate, including the valuable Fifth Avenue flagship, at 3 times.

André Bourbonnais, senior vice president of private investments at the Canadian fund, said, “The company’s strong market position, combined with an expected increase in U.S. luxury goods spending, provide attractive opportunities for future growth.”

Katz, who was in New York for fashion week, said in the interview that shoppers wouldn’t notice the change of ownership in the stores.

“We’re going to remain very focused on delivering the best-edited merchandise assortment,” she said. “Our customer service remains the most important thing.”

The ceo said there’s an opportunity for the company to roll out more of its smaller Last Call outlet stores.

Asked about a possible expansion into Canada, where Nordstrom Inc. is branching out, Katz said, “As we’re exploring opportunities for the next few years, we’ll take everything under consideration.”

Once the deal closes, she will have new owners to run those kinds of possibilities by.

“They are very open to really talking about what are the opportunities on a long-term basis,” Katz said. “That’s what’s gotten myself as well as the Neiman Marcus management team very excited about this change in our ownership.”

The company has 41 Neiman Marcus doors, two Bergdorf Goodman locations, 35 Last Call off-price locations and six Cusp contemporary stores. The firm’s growing Web operations generate nearly $1 billion in revenues annually. Unlike Saks, which is real estate rich, Neiman’s owns only six of its namesake doors, although it has other owned stores subject to ground leases.

Arnold Aronson, managing director of retail strategies at Kurt Salmon, said the deal would continue to “keep Neiman’s out of the quarterly glare of the public marketplace and gives them more running room to do their own thing.

“They might not be able to build more stores in the United States, but the name Neiman’s is a brand that has potential,” Aronson said. “Without a strong brand name, there’s really nothing to really pin your hopes on. This is more what you could call a sure and steady kind of investment.”

The investment does leave one major question lingering: What happens when it’s time for Ares and the pension fund to move on?

Financial sponsors typically hold their investment for five to seven years before exiting.

“I’m always concerned when private equity buys a company like Neiman’s,” said Gary Wassner, co-ceo of Hilldun Factors. “Their objectives are clear and their windows are narrow. I don’t fault them. It’s their business model. I just wish that Neiman’s could have been bought by a retailer or a company that wants to be involved for the long term. Changes in ownership inevitably lead to management shake-ups and perspectival changes as well.”

J. Michael Stanley, managing director at factoring firm Rosenthal & Rosenthal, isn’t necessarily bothered by the flip to another financial sponsor. “What’s going to happen for Neiman’s is that the new owners are going to want growth and performance,” he said. “Their reality is a three- to five-year timeline. As a factor lending to clients, I’m less concerned [about who the owner is] because I’m looking at [whether to lend] on a case-by-case basis.”

Credit Suisse advised Neiman’s on the deal and RBC Capital Markets and Deutsche Bank Securities Inc. worked with Ares and CPPIB. The advisers will all help finance the transaction with debt.


• Los Angeles-based Ares Management has roughly $66 billion in committed capital and a history in the consumer space, having invested in Floor & Decor, General Nutrition Centers, House of Blues, Maidenform, Samsonite, Serta, Simmons, Smart & Final and 99 Cents Only Stores. David Kaplan is senior partner and cohead of the private equity group.

• The Canada Pension Plan Investment Board is the investment manager for funds not needed by the Canadian Pension Plan. The Toronto-based firm invests in public and private equities, real estate, infrastructure and fixed income instruments. It is managed independently of the Pension Plan and at arm’s length from the government and has 188.9 billion Canadian dollars, or $181.4 billion at current exchange. André Bourbonnais serves as senior vice president of private investments at the firm.


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