By David Moin
with contributions from Evan Clark
 on December 22, 2015
Outside a Bon-Ton location.

The Bon-Ton Stores Inc. is heading into a decisive year.

According to sources, the York, Pa.-based department store chain has been talking behind the scenes with Stage Stores Inc. and Belk Inc. about a possible merger or sale, although nothing appears imminent.

Bon-Ton’s stock rose 1.9 percent to $2.14 on Monday, after rising 6.6 percent to $2.10 on Friday on the Nasdaq.

“Tim Grumbacher realizes that scale matters,” said a source familiar with the situation, referring to Bon-Ton’s chairman and major shareholder. “He would be thrilled if Sycamore wanted to partner, but I don’t think Stefan Kaluzny [managing director of Sycamore] is interested.”

Stage, which like Bon-Ton operates a regional chain, has a long track record of acquisitions and appears the more probable partner in a merger. The source added that Stage has been “eyeballing” Bon-Ton.

The $1.6 billion Houston-based Stage operates about 850 stores in 40 states. The stores average 18,200 square feet of selling space. Over the last two decades, the company has acquired 45 Beall-Ladymon stores; 34 Uhlman’s stores; the 246-unit C.R. Anthony Co.; the 136-unit Peebles chain; the 78-unit B.C. Moore chain and, in 2009, the Goody’s name was purchased through the Goody’s bankruptcy. Stage’s nameplates include Stage, Bealls, Palais Royal, Peebles, Goody’s and Steele’s, an off-price concept.

Bon-Ton also operates different regional nameplates including Bon-Ton, Elder-Beerman, Boston Store, Bergner’s, Herberger’s and Carson’s.

There were discussions between Bon-Ton and Belk earlier this year around the time Belk hired investment bank Goldman Sachs & Co. to help it evaluate strategic alternatives, including a sale. Belk was sold to Sycamore in a $3 billion deal that closed in early December.

Bon-Ton’s regional reach across the Middle Atlantic and Midwest would be a good fit with Belk’s Southern presence and pedigree. In addition, the two retailers have similar customer profiles and vendor matrices. It is believed that Tim Belk, ceo of Belk, has always regarded the Belk name as purely Southern so as one source close to Bon-Ton said, “He’s had no interest in stretching Belk.”

Now that kind of decision on how to grow Belk, pushing it beyond its Southern reach, would be Sycamore’s. The private equity is likely to explore numerous options to grow the firm since it will eventually seek to exit the investment at a profit.

Other retailers said to have examined Bon-Ton are the Hudson’s Bay Co., led by executive chairman and governor Richard Baker. But Baker would likely not be interested given Bon-Ton’s lack of owned real estate, though he could “cherry-pick” some Bon-Ton locations for the Lord & Taylor division of HBC, in the event Bon-Ton gets broken up.

Buying Bon-Ton would not be cheap. There is about $1 billion in debt and little equity. Further impeding a deal are questions about the long-term viability of many of Bon-Ton’s stores, particularly those situated in “B”- and “C”-caliber malls where traffic is slowing.

For any deal to go through, it would have to be approved by Grumbacher, who owns more than 20 percent of Bon-Ton’s common stock and about two-thirds of the voting rights.

But for Bon-Ton, a hookup with another retail chain to gain scale and consolidate costs seems crucial to its long-term survival. The company started to slip after Bon-Ton purchased the 142-unit northern department stores of the former Saks Inc. in 2005 and grew its store base as well as its debt load. Bon-Ton reached $3.4 billion in annual revenues at one point but is now around $2.8 billion.

The retailer, hurt by unseasonably warm weather and weak traffic trends, reported a net loss of $34 million for the third quarter ended Oct. 31, about triple the loss of $11 million in the year-ago quarter. Comparable-store sales decreased 2.6 percent. For the nine months, the net loss was $107.7 million, compared to $78.7 million in the year-ago period.

“The current performance — it’s unsustainable,” said Scott Tuhy, debt analyst at Moody’s Investors Service. “Some of the things Bon-Ton is trying to do have worked for other people,” he said. “Localization makes sense. There’s a lot of catching up to do on e-commerce. They’re trying to do the things that are in their control.”

He noted Bon-Ton’s sales have been declining for years and that the company confronts competitive off-pricers, a revitalized J.C. Penney and pressure from Kohl’s, which is regaining market share. It faces these threats with more than $1.1 billion of debt.

“They’re going to spend north of $60 million this year just financing the debt, which is money you don’t have to invest,” Tuhy said. That’s about half of all the company’s projected earnings before interest, taxes, depreciation and amortization.

“It’s more of a capital structure and debt issue than, ‘Does this company survive?’” Tuhy said. “There’s a place in the world for Bon-Ton. This isn’t Blockbuster by any means. The issue that they have is their debt burden.”

Bon-Ton’s ceo Kathryn Bufano, who was formerly president of Belk, is considered a strong merchant and leader and has instituted a comprehensive turnaround strategy — from adding brands to the selling floors such as Under Armour and Vera Bradley to bolstering key-item presentations and furthering localization efforts — while seeking to reduce debt and balance some of the promotional cacophony with image branding. The company is also growing e-commerce and raising private-brand penetration. To take care of some of its debt, Bon-Ton in June said it entered into a $84 million sale-leaseback agreement with real estate investment trust CPA: 17 – Global for six retail properties. The sale-leaseback allowed Bon-Ton to address the maturity of a mortgage facility and also provided some financial flexibility.

Funds from the transaction will be used in combination with money from the company’s revolving credit facility to pay one of two of Bon-Ton’s mortgage loan facilities maturing in April. Each of the mortgage facilities has principal outstanding of about $105 million and consists of 12 properties.

Tim Grumbacher declined to comment. Officials at Sycamore and Stage could not be reached.

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