Wall Street is taking a wait-and-see approach to Nordstrom Inc.
Shares of the department store fell 3.3 percent to $47.70 Wednesday after a special committee of the board ended buyout talks with the Nordstrom family. The Nordstroms offered to acquire the company for $50 a share and then, according to a source close to the situation, upped their offer only to ultimately fall short.
The deal, at $50 a share, or $8.4 billion, would have been financed with $2 billion worth of shares from the Nordstroms, who control 31.2 percent of the company, up to $2 billion secured through Leonard Green & Partners and then debt being lined up by a bank.
The relatively minor drop in the share price could show that the special committee was right and that at least the $50 bid didn’t mark much of a premium over the current value of the company. On the other hand, it could signal that investors are still holding out hope that some kind of a deal will eventually be reached.
A source told WWD that the committee’s move to terminate negotiations marked the end of the process for the foreseeable future.
But it is also not uncommon for motivated buyers to try repeatedly and over the course of several years to close a deal.
A family spokeswoman said the Nordstroms were “very disappointed” but that “they have always run Nordstrom with integrity and a full commitment and they’re committed to continuing to do so in the future.”
In a twist of fate, the Nordstroms’ effort to get away from the glare of Wall Street was hurt by a quirk of Washington State law that forced them to reveal the process to investors much earlier than would otherwise have been the case.
The state statute, which governs transactions between companies and groups of shareholders with stakes exceeding 10 percent, prompted the family to show their cards last June when the stock was at $40.48.
It was a particularly hard period for retail and it took months to sync up with Leonard Green and line up financing. Ultimately, time ran out as worries surrounding bricks-and-mortar retail intensified. Interest rates on the necessary loans were said to be too high and the process was shelved in October.
Holiday turned out well enough, for Nordstrom and retail overall, and the process started back up, but the special committee of the board nixed the family’s first offer of $50 a share. That represented a 24 percent premium to the family’s way of thinking, but was below where the stock was trading at the time, at least in part because investors were anticipating a buyout offer.
Had the Nordstroms been able to line up financing and a partner behind the scenes, the timing and stock price might have made the offer look more palatable.
Now the Nordstroms, the company and its investors are at something of an impasse.
“It’s hard to imagine that remaining a public company is going to change the way [the family wants] to run the business,” said Simeon Siegel, a stock analyst at Instinet. “The challenge is to figure out how to get the Street to buy into what they wanted to do as a private entity. It’s hard to imagine that they’re going to change their plans.”
The Nordstroms’ Seattle neighbor Jeff Bezos gets away with plowing much of Amazon’s profits back into growth projects, but few can pull off that trick.
However, the Nordstroms do have a long history of investing to update the company’s approach, buying HauteLook and Trunk Club and, just this month, digital selling tool BevyUp and conversational commerce platform MessageYes. The retailer is also spending to push the Rack unit into Canada, following an expansion of full price stores into the country in 2014.
“They are the most compelling house on a challenged block,” Siegel said, noting the family’s willingness to spend on keeping their customers loyal.
The analyst was walking the floor at the ShopTalk retail and e-commerce conference in Las Vegas and said he saw plenty of concepts echoing the Nordstrom approach.
“So many new start-ups in technology are focused on really solidifying loyalty,” he said. “Nordstrom has that and they continue to earn that, at an expense.”
And clearly, the family wants to do more.
“The potential outcomes feel like a ‘Choose Your Own Adventure’ story, there are just a lot of different angles,” Siegel said.
For instance, the family could decide to push ahead with bigger investments, which could lower profits, which lower the stock price and ultimately make another try at a buyout more attractive. But lower profits, specifically earnings before interest, taxes, depreciation and amortization, would limit the amount of debt that could be raised to finance a deal.
Lower profits in the short run could also invite in activist investors who might push for more immediate bottom-line gratification.
Where does the money Nordstrom makes go? To the bottom line or investments — and how much? That’s the question the family management team has to answer now.