The trading floor at the New York Stock Exchange.

Retail rode Wall Street's roller coaster on Tuesday. The lack of credit could dry up any major deals in the industry for the foreseeable future.

Retail rode Wall Street’s roller coaster on Tuesday as the Federal Reserve Board’s interest rate cut sent the market zooming. But daily thrill rides aside, the lack of credit could dry up any major deals in the industry for the foreseeable future.

This story first appeared in the March 19, 2008 issue of WWD. Subscribe Today.

That could put a crimp in deals such as Baugur Group’s interest in acquiring Saks Inc., sources said. The Icelandic firm is said to need time to pull together the financing for a purchase of Saks Inc.

Meanwhile, Wall Street had a glimmer of good news with the Fed’s decision to cut rates by three-quarters of a percentage point. While the sector has been hammered over the last few months given the economy’s doldrums, it seemed to benefit from the Street’s greater optimism — at least for now. The S&P Retail Index swelled 5.6 percent to end the day at 382.69 and the WWD Composite Index edged up 3.3 percent to 865.23.

Notable gainers included: Talbot’s Inc., which climbed 7.8 percent to $10.32; Kohl’s Corp., which increased 6.4 percent to $42.53, and J.C. Penney Co Inc., up 6.2 percent to $39.88.

Retail giant Wal-Mart Stores Inc. grew 2.1 percent to $50.98, while rival Target Corp. shot up 5.1 percent to close at $50.99.

Overall, the Dow Jones Industrial Average closed up 3.5 percent to 12,392.66, while the broader S&P 500 surged 4.2 percent to 1,330.74.

Hedge fund managers evaluating the Fed’s move told WWD that they believe the actions to pump liquidity into the markets are working, allowing banks and market participants to borrow money cheaply. However, they don’t expect any big jump in mergers and acquisitions activity until near the end of the year.

One investor wasn’t sure if the markets have bottomed out yet, noting that financial sponsors are not doing any kind of transactions. He expects continued volatility in the markets throughout the year, adding that there are still “hundreds of billions of debt from deals last year that were never syndicated and are still on the banks’ balance sheets.”

That debt needs to be cleared out before anyone will do new deals, he said, adding that more hedge funds will likely shut down as the year draws to a close.

“The megadeals are over,” he said.

That could be bad news for Baugur on several fronts. According to a London-based venture capitalist, the Icelanders are particularly exposed in the global credit crunch.

“A huge appetite for risk and an incestuous economy has increased the concern about Iceland, its banks, and economy as a whole,” he said, adding that one of Baugur’s major sources of funds is Kaupthing Bank, based in Reykjavik.

“Baugur will be affected by this despite being very well respected for its expertise in retailing. Being a privately held company makes it hard to fully understand exactly how risky they are, but the sheer speed of acquisitions in retailing has raised some warning flags,” he added.

A London-based retail consultant said that while Baugur has been canny in making its investments — the company typically takes minority stakes in retailers, and partners with management or other smaller investors — it could well run into trouble when it decides to pursue larger investments.

“The smallish companies are less of a problem for Baugur. It’s the big ones, like Saks, which are more problematic. There is so much money involved and so much more at stake for the banks doing the lending,” he said.

Last month, Baugur made an indicative takeover offer for the British mid-market men’s wear retailer Moss Bros, valuing it at about $80.5 million. Two of the families that hold stakes in the company are fighting the bid, arguing it’s too low.

“Moss Bros is on its knees,” said the consultant. “That level of transaction isn’t a real problem for Baugur.”

Although Baugur may be looking at some gloomy times ahead, it also has access to private funds, mainly from rich Russian investors.

“In the grand scheme of things, I think Baugur would be the least affected by the credit crunch because of their access to this private equity,” said one London-based retail analyst.

But observers believe any Baugur/Saks deal is on hold for the time being given the American economy’s continued wobbles. The Fed slashed the federal fund rate by three-quarters of a point in an effort to avert a more severe credit crisis, but investors were initially disappointed, sending shares down and nearly wiping out the gains from the morning’s trading session. That disappointment faded as investors realized the cut was still a substantial one.

The cut, which comes on the heels of the Bear Stearns’ bailout by J.P. Morgan at $2 a share, brings the federal funds rate — the interest that banks charge each other — to 2.25 percent, its lowest since 2004.

“Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters,” the Federal Reserve said.

“Our financial markets have also been subjected to stress. And the Federal Reserve and the Treasury acted swiftly to promote stability in our financial markets at a crucial time,” President Bush said Tuesday as he toured a port facility in Jacksonville, Fla. “It was action that was necessary.”

He said the government is prepared to intervene, again, if necessary.

“And the point I want to make to you is, if there needs to be further action we’ll take it, in a way that does not damage the long-term health of our economy,” Bush said.

The President spoke about the worsening economy in a speech aimed primarily at pressuring Congress to pass a free trade agreement with Colombia, which he said is a crucial component in stabilizing the region. Bush has said he will send the trade deal to Congress for a vote in early April without the support of the Democratic leadership.