Shares of Nordstrom Inc. fell 6.3 percent Monday on fears that the Nordstrom family might have trouble taking the company private, even though a decline in the stock price could ultimately help get the transaction over the finish line.
Investors have been speculating — and hoping — that a takeout could be had at around $50 a share, even though they’ve also acknowledged that the price would mean a higher debt load and a greater likelihood that the transaction gets derailed. But those hopes seem to be dashed, for now, with the stock at $44.18, down from $47.15 on Friday.
The thinking in certain financial circles has been that $47 or $48 a share might be the more doable, even if it means waiting until next year to close on a deal. A special committee of Nordstrom directors is responsible for evaluating any offer from the family and Leonard Green & Partners, the private equity firm the Nordstroms are said to be working with.
One financial source said Leonard Green, which is seen as lining up the financing for the deal, is still trying to figure out what’s possible in the debt market.
The source said the deal was still possible, but likely couldn’t get done this year as initially planned given the general wariness around retail and difficulties getting any deal done during the holiday sales season.
“My gut is it flips to next year,” the source said. “From a timing perspective, it’s near impossible to do this this year.”
That means the ultimate pricing of the financing, or if a deal gets done at all, could hinge on how well Nordstrom fares during the holiday season — a make-or-break period for stores that is increasingly being disrupted by digital players.
Although the benchmark for any deal will be the $40.48 shares closed at before the Nordstrom family said on June 8 that they were considering a buyout, the special committee would be loath to accept a price that made it look like it was giving away the company on the cheap.
But with the stock back closer to levels seen before the Nordstroms took their plans public, a deal at $47 or $48 looks better.
That’s a price that would be more palatable to Leonard Green. A lower share price translates into less risk for the private equity firm, as well as lower debt leverage. That would make it easier to get financing in the debt markets and, according to sources, lower debt leverage would also translate to a higher return to the Nordstrom family on its investment.
It wouldn’t be the first time a deal was put on temporary hold until the stock price realigns with the dealmakers’ expectations.
Earlier this year, in the Coach Inc. and Kate Spade & Co. deal, the two took additional time to negotiate when the Kate Spade share price got ahead of itself in anticipation of a deal. Kate Spade’s stock rose to $24.24 in March, when many investors expected a deal in the $24 to $25 per share range. But the talks cooled and the shares fell to $16.97 in early June, helping a deal get done at $18.50 a share, or a total of $2.4 billion.
For the Nordstroms, a cool-down period leads them to the holiday season, which one financial source noted could complicate the transaction “even though optimism at [Nordstrom] has not gone away and nothing has changed from the family standpoint.”
Nordstrom has fared better than many of its competitors in the shifting retail landscape, and that’s not expected to suddenly change over the holiday season. Another financial source said that a deal that has a lower debt leverage — no more than “$5 billion and change” — would provide further breathing room in case of an unexpected depressed holiday season or another rise in interest rates before a deal can get completed.