The narrative around the Nordstorm family’s nine-month effort to take full control of the department store that bears their name has been obsessed with the “whos” and “hows” of the matter.
Mainly, who are they going to partner with and how are they going to afford it?
But the “why” of it all has largely been overlooked and might ultimately be the most important question, for Nordstrom Inc., the family and their competitors.
A deal, if there is one to be made, still lies in the future, but its outlines are clear. The family ponies up about $2 billion in stock, private equity firm Leonard Green & Partners and its affiliates would chip in as much as $2 billion, and banks have submitted financing proposals that top out at $7.5 billion in debt. The family’s first offer, at $50 a share or $8.4 billion, was rejected as too low, kicking off the wrangling between the Nordstroms and a special committee of the company’s board.
The Nordstroms already own 31.3 percent of the company and while their first offer included the sale of 10 million of their own shares — a $500 million boost to their collective wallets — the proposal is clearly not about making money. The family has cut off its surest path to a big, immediate windfall by saying they would not vote to sell the business to any other buyers.
Instead, the Nordstroms are looking to dramatically add to the company’s debt load and bring in a partner who sooner or later will have to be bought out.
(According to S&P Capital IQ, Nordstrom has $2.7 billion in total debt, equal to a very low 1.7-times its earnings before interest, taxes, depreciation and amortization. A deal with the max of $7.5 billion in debt would yield a debt-to-EBITDA ratio of 4.7-times — higher than J.C. Penney Co. Inc., at 4.3-times, but well below Neiman Marcus at 11.7-times.)
The family could more readily make big changes away from the glare of the public markets, but to get there, they would also have interest payments that would make it harder to make those changes.
But Edward Yruma, stock analyst at KeyBanc Capital Markets, argued that the company is coming out of a capital-intensive period — when it spent to break into Canada, set up a store in Manhattan and expand the Rack off-price unit — and can start to ease off its capital expenditures.
Instead, Yruma said the family could be looking at the longer term and seeing a new epoch in retailing, like when smaller independent stores were overtaken by department stores.
“When you’re competing against Amazon, they think incredibly long term and we’re at this really interesting inflection point for the business where [the Nordstroms have] done all the right things so far, but if you look at these moments of change in retail, eight or nine out of 10 retailers disappear at this juncture,” Yruma said. “The family’s super concerned with, ‘We don’t want to be the generation that messed it up.’ Their name hangs outside that door and they are laser focused on making sure that doesn’t change.”
One person familiar with the process said: “Going private would enable them to have more flexibility in a way that would enable them to have life for the next 100 years.”
If the rise of e-commerce does mark a sea-change that will force 80 percent or more of the current crop of merchants to fail and that’s what the Nordstrom family is sensing, the “why” of the buyout could be a harbinger of further changes to come across all of retail.
The time might have come for all companies to move — and fast.
The same conclusion could be drawn from Walmart Inc.’s recent moves, to buy Jet.com and a string of smaller digital players and to rapidly take a more forward-leaning digital stance.
Interestingly, the Nordstrom deal might be less an effort to project a more digital take on retailing than a belief that retailing still requires stores. The Nordstroms are forward-leaning retailers, but retailers nonetheless and they see the store as continuing to be relevant alongside the web.
Still, the stock market remains fixated on digital growth rates.
“It’s the same conversation as to why we haven’t seen that many IPOs, but in reverse,” said Simeon Siegel, an analyst with Instinet. “Public markets have been so consistently unfavorable to retail.”
Siegel said the Nordstroms “clearly believe that spending to grow or spending for the future of the business is key.”
The logic on the family’s part works “as long as they believe it is easier to pay an interest payment than it is to convince a Wall Street investor that big retail, brick-and-mortar investment is something to be embraced and not feared,” he said. “Should any deal happen, they would clearly need to be focused on the long-term ability to pay down the debt, because, as history has shown us, it’s very hard to kill a retailer. The only way it happens is by levering up.”
So the Nordstroms could be risking the only thing that could destroy their business — debt — to survive and thrive in the Internet age.
If that’s what Nordstrom, operating from a position of relative strength, needs to do, what are the scores of weaker players going to have to do to keep up?