Neiman Marcus is under water — the debt on its balance sheet exceeds the underlying value of the business right now.
That doesn’t mean that Hudson’s Bay Co.’s Richard Baker won’t get his heart’s desire, but it does mean it will take some effort to get a deal together. (He has long been interested in Neiman’s and is said to be evaluating a potential transaction now.)
Oliver Chen, a retail analyst at Cowen and Co., said there was only a 40 to 50 percent chance a takeover gets done, but that if the two sides do come together for a deal “the structure will need to be creative given high financial leverage at both the potential acquirer and target.”
“In our view, a potential Neiman Marcus acquisition would likely be less of a real estate play for HBC compared with prior deals [e.g., Kaufhof acquisition] given a majority [34 locations] of the 42 Neiman Marcus store properties are either leased or building-owned with ground lease, while only six properties are owned and two are owned subject to partial ground lease,” Chen said.
Deals are typically priced at a multiple of a companies earnings before interest, taxes, depreciation and amortization — a financial metric that gauges how much money flows through a business and, therefore, its ability to carry a debt load.
For comparisons, Chen looking at a range of deals over more than a decade, including the 2015 transactions for Belk Inc., which Sycamore Partners bought for seven-times EBITDA; Kauhof, which Hudson’s Bay bought for 8.6-times EBITDA, and Ann Inc., which Ascena Retail Group Inc., acquired for 8.4-times EBITDA.
The analyst said history implies a value on Neiman’s of at least 8.5- to nine-times EBITDA, or $4.1 billion to $4.4 billion.
Part of the problem is Neiman has $4.6 billion in debt on its books, our about 9.4-times EBITDA. The other part is that Ares Management and the Canadian Pension Plan Investment Board bought Neiman’s for $6 billion, in a 2013 deal with TPG and Warburg Pincus.
That makes it hard for the current owners to realize the big dreams behind their initial investment.
But Ares and CPPIB don’t have many good options for an exit. They tried for an IPO, but had to pull the plug on it earlier this year.
And Baker is a motivated buyer.
When WWD asked a prominent banker whether or not Baker gets they deal done, then answer was simple: “He always does.”
Time will tell if that remains true.
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