But now the clock is ticking.
And just how much of a debt load the business can bear — an area where the company has long been prudent — is coming into sharper focus. The retailer is courting larger private equity players and sovereign wealth funds as equity partners, but bankers hoping to funnel billions of debt into the deal are getting anxious because the window to do a deal this year is narrowing.
“There’s not a plan yet,” said one banker. “That is frustrating and it creates a timing issue. They clearly want to leverage this thing up as much as they can to minimize the outside equity needed. The challenge is, What can you realistically do? They don’t have a good handle on it. My gut here is that they need somewhere around a billion and a half of outside equity.”
That would put the deal at $52.50 a share and give Nordstrom an enterprise value of about $11 billion — although others suggested it would be difficult for the Nordstroms to pull off a transaction at so high a price and suggested something under $50. The stock closed Monday up 37 cents to $48.94 — 20.9 percent above its price right before the Nordstroms revealed their plans on June 8.
“It’s a risky deal,” the banker said. “The biggest thing is timing. If you work backwards, none of the banks are going to want to have exposure [raising the debt] through November, December. You have to be out of the market by early November. For that to be the case, that means you have to basically have a deal announced by the beginning of October.”
Financial sources said the Nordstroms held talks with potential investors last month at company headquarters in Seattle, but that private equity firms weren’t overly eager to buy in, even if they received preferred shares that would give them extra protections.
Linking up with the family to take the company private would be something of an unusual move for many private equity firms, which tend to buy in and hold for three-to-five years and then make their money selling to another buyer or through an initial public offering. In this case, the Nordstrom family appears to want to hold onto the business and continue to build it as a retailer.
Many of the private equity firms that could conceivably take on a deal of that size have opportunities in other sectors and have been burned in the retail space and have other investments still playing out — such as TPG Capital with J. Crew Group Inc. or Ares with Neiman Marcus Group.
And the deal isn’t made any easier by the cloudy future facing brick-and-mortar retail, Nordstrom’s track record of outperformance and service-savvy stores notwithstanding.
Financial sources said discussions are continuing with would-be partners, while other market sources described the conversations as “informal.” Another market source said the talks are “just that, talks. Nordstrom is not in negotiations with anybody.” These individuals also emphasized that there isn’t any “structured auction” or “formal process” at play.
The potential of a transaction has opened a window onto a process that usually plays out in private, but was made public because the family needed to get a waiver for a Washington State statute. The law restricts transactions between companies and groups of shareholders owning more than 10 percent of that company.
The Nordstroms own 31.2 percent of the Seattle-based firm, which was cofounded by John W. Nordstrom in 1901, and have a long record of strong retailing.
But it’s been a tough stretch for all retailers, including Nordstrom, as mall traffic has waned, more shoppers buy online and Millennials favor experiences over goods. The thinking is that the Nordstrom family will be better able to tackle these challenges and successfully remake the department store chain away from the glare of public markets.
But they might have to keep their eye on what is for them an unusual benchmark: J.C. Penney Co. Inc.
Debt watchdog Moody’s Investors Service noted Nordstrom’s adjusted debt amounts to 2.6 times its earnings before interest taxes and depreciation. Any buyout would likely cause the company’s debt to increase and prompt it to lose its “Baa1” credit rating. The question is how far can they push it.
“We would view adjusted debt/EBITDA as needing to remain below 4.5-times…to retain enough financial flexibility to pursue its strategic goals,” Moody’s said in an analysis, pointing to Penney’s as a proxy, with a ratio of 5.4-times.
Given the company’s relatively strong position now and the uncertainty of the future, some Wall Street sources are scratching their heads wondering why the Nordstrom family would even consider cutting a deal that would give a new investor preferred shares, noting that the idea was likely thrown on the table to see what would trigger private equity interest.
That has brought some private equity firms back in for another around of talks, but one source noted: “Private equity these days don’t really want to commit any money to brick-and-mortar. And in today’s market, a private equity guy could be risking his career if he recommends a retail investment at a time when sentiment toward retail is not that high.”
Another source puzzled over why the family would want to put more debt on the company, noting a downturn in the economy and decline in sales could significantly endanger the business. “Why would they do this when they already own 31 percent of the company?” this person said.
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