NEW YORK — The sale of Lord & Taylor reaches a critical phase this week.

According to sources, senior management from Lord & Taylor will make formal presentations over the next few days to up to four bidders, among a field of approximately 10.

As reported, initial bids were due May 19 and Lord & Taylor’s parent Federated Department Stores Inc. was quick to narrow the field. The retailer is believed to be keen on at least three bids, according to sources familiar with the process. Investment banking contacts didn’t know the amount of the bids, but one banker said he believed Federated was getting offers in line with its asking price of $1.2 billion. After this week, another round of bidding is expected.

The sources also said that Federated, which inherited Lord & Taylor through its acquisition of May Department Stores last year, is likely to sell it to a consortium that includes a real estate company, a private equity firm and possibly a retailer operator. That would keep the chain going, at least for a few years, and out of the hands of a more direct competitor, such as Nordstrom.

“The key issue is that Federated wants someone to operate Lord & Taylor,” said a financial source.

One joint bid was submitted by Schottenstein Stores Corp. and Kimco Realty Trust. A real estate source said this team “could be the one to beat.’’ In this scenario, Schottenstein would operate the unit and, together with Kimco, could maximize the real estate assets.

A difference between this and the other bidders is that Schottenstein itself is an operator and as such could add greater value on how to mold and position the Lord & Taylor business. There is also a stronger possibility that the business would stay within the Schottenstein umbrella.

The other bidders are private equity players. While they have bought retail operations in the past, their typical mandate is to keep the existing retail management team in place, make necessary changes and eventually sell the operation as part of their exit strategy.

Federated is said to be concerned about the possibility that Lord & Taylor might eventually be sold to a competitor, such as Nordstrom, a scenario that could happen down the road in the event the unit is sold as part of a financial player’s exit strategy. Federated would not consider Schottenstein as much of a direct competitor as Nordstrom.

This story first appeared in the June 5, 2006 issue of WWD. Subscribe Today.

Another team bid was submitted by Cerberus Capital Management and Sun Capital Partners. This duo was part of an investment consortium, along with Lubert-Adler/Klaff and Partners, that bought Mervyns from Target Corp. for $1.2 billion.

Spokesmen for Cerberus, Schottenstein and Kimco did not return calls for comment.

Also in the chase for the Lord & Taylor division, and joining forces for the second time in an apparel and retail bid, are Texas Pacific Group and Warburg Pincus. Texas Pacific and Warburg together successfully won the bidding for Neiman Marcus Group last year. The private equity firms paid $5.1 billion for the luxury retailer.

Those same sources said that the three groups are believed to have been among those invited to the management presentations. A spokesman for Federated Department Stores declined comment. A spokesman for Sun Capital Partners said, “It is the firm’s policy not to comment on deals we may or may not be involved in.’’

Some financial sources indicated that Dean Adler, a Philadelphia-based developer who in the past purchased units of Montgomery Ward and Kmart and was in on the deal to buy Mervyn’s, along with Cerberus and Sun Capital, remains interested in Lord & Taylor. He was also an unsuccessful bidder for Toys ‘R’ Us and is believed to be hungry for another acquisition. He has a reputation for being a savvy converter of discarded retail real estate. He could not be reached for comment.

According to real estate and Wall Street sources, Vornado also submitted a bid. However, Vornado is not believed at this point to be a leading contender because it appears to lack an operating partner. Vornado would be interested in capitalizing on as much L&T real estate as possible, rather than continuing to operate the Lord & Taylor business.

Federated already has dismantled a number of retail nameplates over the years, including Abraham & Straus and Bamberger’s, and officially renamed 400 former May doors as Macy’s in September. It has no interest in being known as the company that buys and shuts down other retailers, which is why it is keen to sell to a consortium that would continue to operate L&T.

The Federated management has already taken heat for converting much of the May divisions into Macy’s, particularly Marshall Field’s, which has enormous hometown loyalty.

Whatever group Federated sells Lord & Taylor to, there have been rumblings the L&T of the future won’t be quite the same as it exists now. A few choice locations, including the Fifth Avenue flagship here and possibly the Chicago unit in Water Tower Place on Michigan Avenue, are among the locations that represent prime redevelopment opportunities. The flagship generates roughly 10 percent of Lord & Taylor’s volume, and nowhere near the volume of other big department store flagships in the city, such as Bloomingdale’s 59th Street and Saks Fifth Avenue. Those big boxes account for about 20 to 25 percent of their chains’ volumes.

“The flagship is too old and requires too much capital,” said a source close to the business. The Chicago unit is not considered a top performer.

Lord & Taylor’s real estate provides some financial cushioning for anyone that buys the chain. Sites sold off could recoup a lot of the purchase price. Estimates on Lord & Taylor’s real estate that could be sold off are around $700 to $800 million, including the flagship, which is roughly half that. Still, the 54-unit Lord & Taylor does have many suburban units that perform well, including the New York suburban Westchester unit and one in Manhasset, N.Y.

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