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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.
This story first appeared in the July 18, 2007 issue of WWD. Subscribe Today.
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
|FY 2005||$1.41 billion||
|FY 2004||$689 million||
|FY 2003||$693 million||
Macy’s Top Institutional Holders
|AXA||27.4 million shares||
|FMR Corp.||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||
|Credit Suisse||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