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Starwood Capital Emerges With Bid for Saks Inc.

The luxury chain's stock spiked Friday on news of the offer, which followed an earlier bid from Hudson’s Bay Co.

Saks Fifth Avenue

Saks Inc.’s stock spiked Friday on news that Starwood Capital made an offer for the luxury chain following an earlier bid from Hudson’s Bay Co. While some reports have Starwood bidding in the $17 to $18 range, financial sources believe it is a longshot that Saks sells at that high a price and that $15 to $16 is more likely based on the company selling at $11.50 prior to putting itself into play.

Sources also said a small private equity firm was seriously interested in Saks and could also bid. Qatar Holding, an investment company linked to the royal family of the Gulf state, could be looking at Saks as well to bolster its growing luxury portfolio. Qatar Holding has been buying up Tiffany stock, and bought Printemps in Paris earlier this year and Harrods in London in 2010. In addition to Qatar, private equity firms such as Thomas Lee, KKR & Co. and Leonard Green & Partners are considered possible suitors, though many firms, including retailers, have kicked the tires at Saks.

Saks Inc. stock surged late Friday on a New York Post report that Starwood had put in a bid for the company. The surge brought the stock to a new 52-week high of $17.51, before shares faded back to close at $15.89, up $1.21, or 8.2 percent. Volume was 7.7 million shares, about three times the average pace. The Post reported that Starwood bid somewhere between $17 and $18 a share. Based on 152.8 million shares outstanding, a price range of $17 to $18 would value Saks at $2.6 billion to $2.75 billion.

Saks has been a challenged business for many years, struggling to grow its profitability and widely believed to have a challenging future unless it becomes part of a retail conglomerate enabling consolidations, cost savings and synergies and increased buying power. It’s been in play from time to time over the years, and on a couple of occasions considered a merger with the stronger Neiman Marcus Inc. In May, Saks was put in play again, after the luxury chain gave Goldman Sachs the green light to try to sell the company.

Sources expect a resolution to the Saks situation within a few weeks, if not sooner.

Setting a price tag for Saks is a complicated process. There are a multitude of ways the company could be valued, but the key factors would be putting a premium over the stock price at a certain point in time; the enterprise value, which includes capitalization, debt and cash; earnings before interest, taxes, depreciation and amortization, and the savings that could be attained by consolidating operations and jobs.

This might be a good time to buy Saks. With the stock market rising, and increasing income levels of wealthy customers as economic recovery gains traction, luxury retailers are poised for solid growth. Saks officials have long emphasized that the performance of the business is heavily tied to the stock market. But for the last several years, Saks’ stock has been languishing, encouraging major shareholders to seek a deal.

Some, however, felt the reported offer range was too high. “No one is going to bid $18. That’s crazy,” said one financial source. “The guidepost is $15.”

Saks has steadily closed stores over the past decade and sees a few more closures ahead, and little room for domestic growth with its core full-line store business. It sees more growth with its Internet business; overseas expansion both online and with more stores; by further developing private labels; by rolling out more Off 5th outlets, and with omni-initiatives. Saks plans to launch an off5th.com Web site soon, and recently relaunched the SaksFirst loyalty program and eliminated the minimum threshold limit. The company said it would open stores in Hawaii and Puerto Rico and a replacement in Sarasota, Fla., and executives have suggested the possibility of smaller, more specialized stores. Saks Fifth Avenue’s successful 10022-Shoe footwear format would be among the formats considered. Over the last decade, 20 Saks locations have been closed, including 12 in the last three years, bringing the store count down to 42. By the beginning of 2014, the count will fall further to 40 locations. The burgeoning 66-unit Saks Off 5th outlet chain has been opening six or seven stores annually.

The Starwood bid for Saks puts the spotlight on Barry Sternlicht, chairman and chief executive officer of the privately held Starwood Capital Group, which he launched in 1991, an investment firm with global holdings primarily in real estate, energy and infrastructure. The key focus is real estate. It has more than 1,000 hotels.

Sternlicht is also chairman of Starwood Property Trust, a publicly traded commercial mortgage REIT (real estate investment trust), and he was a onetime investor in Ellen Tracy before it was acquired by Sequential Brands Group in March 2013 (when Sequential acquired Brand Matter). He was part of the consortium that paid $42.3 million to acquire Ellen Tracy from Liz Claiborne Inc. in February 2008. He also is on the board of the Estée Lauder Cos. Inc. He also is chairman of Société du Louvre and Baccarat (Société is the majority shareholder of Baccarat) and serves on the board of Riviera Holdings Corp. As a Lauder board member, he serves on the compensation committee and the stock plan subcommittee.

Industry sources, while believing that Sternlicht would pay up for Saks, also believe being part of Starwood would do little for the future Saks, which might be better off as part of a retail conglomerate. There are also questions on how Starwood structured its bid for Saks — all cash or stock and cash — and whether other, lower bids might be desirable based on a different structure.