leonard green nordstrom buyout go private

Leonard Green & Partners has been playing the long game at Nordstrom Inc. — and it seems to be paying off.

The retail-centric private equity firm has been courting the Nordstrom family for years, making connections and burnishing its credentials, according to a source familiar with the situation.

Just what a deal would ultimately mean for Nordstrom as a retailer remains to be seen, but word that the family has decided to link with the Leonard Green in its attempt to take the firm private, pushed shares of the company up 6 percent to $47.74 Wednesday. That would allow for a slight premium for new investors, with some expecting the deal to get done in the $48 and $50 a share range. Still, getting there means managing many moving parts and lining up bank financing.

Leonard Green is said to have been the Nordstroms’ preferred partner from the start, given its long track record in retail. The firm has invested in many retailers over the years, including J. Crew, David’s Bridal, Lucky Brand and Topshop — although some of those investments, such as J. Crew, have been more difficult than others.

The Nordstroms have every reason to want to better control the destiny of the company that bears the family’s name.

Wall Street has grown skeptical of retail and are not sure exactly how to put money to work in the sector, where stores are closing, e-commerce players are invading — especially Amazon — and the consumer is rapidly evolving.

Retailers by nearly all accounts need to change significantly to keep up and it will be easier to do that away from the prying eyes of the public market.

And Nordstrom has long proven itself to be a company that wants to change with the market, adopting new technologies and experimenting with new concepts, including through the troublesome acquisition of Trunk Club, but also its deal for HauteLook.

Nordstrom also invested in digitally native bottoms brand Bonobos in 2012 and 2014. And while that didn’t lead to an outright acquisition, but a sale of the company to Wal-Mart Stores Inc. this year, the experience with Bonobos did seem to leave an impression on the retailer.

The company plans to introduce a new concept, Nordstrom Local, in West Hollywood, Calif., next month. The 3,000-square-foot store will be service heavy, give access to personal stylists and carry no inventory, making it very much like one of Bonobos’ Guideshops.

If it gets a deal done, Nordstrom would in many regards be freer to continue to experiment and search more aggressively for the future of retail.

But the company would also find itself carrying a much heavier debt load.

The Nordstroms together hold 51.8 million shares of the company, a 31.2 percent stake. But even if Leonard Green puts in a $1 billion or more, the company’s debt load is expected to increase.

Nordstrom carries $2.7 billion in debt, giving it an enterprise value of about $9.3 billion, according to S&P Capital IQ.

A deal to take the company private could mean that Nordstrom has to take on between $7 billion to $8 billion of debt, depending on how much the banks are willing to lend, and on what terms.

One key factor will be how much the family rolls back into the company in the new structure with Leonard Green.

If a deal is completed around $50 a share, that would net the family around $2.6 billion, financial sources noted.

To control the company under the new structure, sources said the Nordstrom family would have to put in a total of $1.5 billion to $2 billion, depending on the financing package.

That would give the Nordstroms a 60 to 70 percent stake, with Leonard Green investing $1 billion or more for the balance of equity ownership.

Sources said Leonard Green has been working hard on its due diligence on the department store since the summer, a factor that has some investors banking on a 65 to 75 percent chance that a deal eventually gets done.

One source familiar with the process said Leonard Green would put in at least $1 billion and get preferred shares. Those shares would give the investor extra protection against losses and facilitate some form of an exit down the line.

Typically, a private equity funding a buyout of this magnitude would be looking toward another initial public offering. But that might not be the case here. Financial sources said the Nordstroms could take back control of the company and then buy out Leonard Green over some set time frame.

Other sources suggested another initial public offering down the line could be the preferred exit. Until the financing is arranged, the exact terms of the Leonard Green’s preferred shares are expected to be in flux.

Either way, Leonard Green’s ultimate exit is expected to be laid out in some form going into the transaction.

Executives at Nordstrom and Leonard Green have not returned calls for comment.