Neiman Marcus: Roosevelt Field Store Opening, New York - 18 Feb 2016Neiman Marcus: Roosevelt Field Store Opening, New York - 18 Feb 2016

The on-again, off-again romance between Neiman Marcus and Saks Fifth Avenue could be back on again.

Rumors are swirling among multiple sources that Saks parent Hudson Bay Co. and Neiman Marcus Group have recently held at least informal talks about a possible merger. While such discussions can be fleeting, and range from casual conversations about the hypothetical to more pointed proposals, the backdrop in retail for such thoughts is at least improving. A strong holiday season has the sales outlook strengthening and dealmaking is perking up.

Spokespeople from Neiman Marcus and HBC said the companies do not comment on rumors or speculation.

Richard Baker, governor and executive chairman of HBC, has wanted to add Neiman’s to his retail stable at least since he acquired Saks in 2013, and many experts believe that a Saks-Neiman’s combination is inevitable.

But exactly when and how such a marriage might come to be is still anyone’s guess.

Neiman’s has a strong name and reputation. The retailer raked in revenues of about $4.7 billion over the past four quarters, its business is seen as improving and the job of chief executive officer has successfully been passed to Ralph Lauren Corp. veteran Geoffroy van Raemdonck from Karen Katz. But the company is also weighed down considerably by $4.4 billion in long-term debt — a legacy of two consecutive private equity buyouts — and like the rest of the industry is looking for the right mix of clicks and bricks.

Neiman’s and HBC had been in talks last year for a time, but the price as well as the significant debt loads of both companies were seen as an impediment and the discussions fell off in June.

Since then, HBC has taken significant steps to become more flexible. In October, the company agreed to sell its Fifth Avenue Lord & Taylor flagship for $850 million to WeWork Cos. and scored a $500 million equity investment from Rhône Capital.

Those transactions brought new partners into the fold and also opened up some financial breathing room for Baker.

“He’s still seriously interested in a deal,” said one retail source, about Baker. “He seems to be chipping away at it. He needs a win.”

While business at the Saks division is improving and Hudson’s Bay in Canada is doing OK, HBC needs to address the struggling Lord & Taylor and Kaufhof department store chain in Germany as well as the Gilt and Saks Off 5th off-price businesses. Last month, former CVS Pharmacy president Helena Foulkes joined HBC as ceo with a mandate from Baker to be a “transformational leader.”

Baker won’t comment on Neiman’s or any deal activity for that matter. But one retail source familiar with HBC said, “I don’t think anything changed [referring to a merger]. There is nothing to write about.”

Sources do suggest no deal is on the immediate horizon and note that Neiman’s owners Ares Management and the Canada Pension Plan Investment Board, which bought the business for $6 billion in 2013, took Neiman’s off the market last year.

Neiman’s operations, which include Bergdorf Goodman and Mytheresa.com, have been generating enough cash to service its debt and the principal on the loans don’t start coming due until October 2020, with a $2.8 billion term loan.

Another source raised the possibility of Neiman’s buying Saks, with Baker holding onto Saks’ valuable real estate including the Fifth Avenue flagship. (There’s some precedent for this since Neiman’s was among the potential buyers of Saks, before the chain was ultimately sold to HBC.)

While it’s not clear how likely that scenario is — with Neiman’s getting Saks and Baker keeping its real estate — most observers expected that any deal would have some kind of real estate component. Neiman’s does not hold the kind of real estate Saks did when Baker bought it, but it still owns some locations that could be used in new and potentially profitable ways.

And Baker is well-positioned to unlock any hidden bricks-and-mortar value. HBC is as much a real estate company as a retailer and dealmaker.

At the WWD CEO Summit in October, Baker said he looked at HBC as a business with three parts.

He noted: “Being a retailer, that is too tough. Man, that is tough. The second business we are in is the real estate business. That’s not as tough. It’s a place where we can make a lot of money. The third business we are in is the merger and acquisitions business. When business is flat and sales and earnings before interest, taxes, depreciation and amortization are flat, you can acquire and squeeze expenses, and drive topline and drive value to the bottom line.”

The sun shines through flags on the facade of Saks flagship store on New York's Fifth Avenue, . Saks Inc. agreed to sell itself to Hudson's Bay Co., the Canadian parent of upscale retailer Lord & Taylor, for about $2.4 billion in a deal that will bring luxury to more North American localesSaks Acquisition, New York, USA

Saks Fifth Avenue  Richard Drew/AP/REX/Shutterstock

The stakes are high all around in any combination of Saks and Neiman’s.

A merger would likely lead to buying and back office consolidations as well as closure of weaker stores.

And designer brands that rely on both chains for revenues and exposure — and to some extent can now play the two off of each other — would find their position weakened if Saks and Neiman Marcus finally come together and control an even bigger piece of their distribution.

For brands and other merchants, a possible merger between two of the biggest luxury department store players marks just another piece of the retail picture that’s evolving.

Already, big changes have come with Walmart Inc. squaring off with Amazon, private equity firm’s snapping up Lanvin and La Perla this year, Tory Burch and Stella McCartney said to be facing possible shareholder changes and more.

Strategic need, digital change and the threat of higher interest rates could all conspire to keep the changes coming — including perhaps the long looked-for Saks-Neiman’s union.

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