By
with contributions from Sindhu Sundar
 on May 13, 2020
Saks Fifth Avenue

Hudson’s Bay Co.’s interest in buying the Neiman Marcus Group appears to be alive and gaining support from the creditor side.

Lawyers for Mudrick Capital Management, which owns $155 million of the term loans issued under the $2.95 billion term loan agreement with Neiman’s in 2013, has contacted lawyers for the retailer’s independent managers urging them to consider a sale of Neiman Marcus Group to Hudson’s Bay Co., owner of Saks Fifth Avenue.

A sale of Neiman Marcus Group would lead to a consolidation of Neiman Marcus into Saks that could involve closing stores, reducing rent and other overhead, changing management, cutting headcount and creating synergies that all add value to the combined entity.

Neiman’s independent managers are Scott Vogel and Marc Beilinson who are involved in the restructuring and other aspects of Neiman’s business and are represented by the law firm Willkie Farr & Gallagher LLP.  They joined the Neiman’s board of managers last April. Mudrick Capital is represented by Gibson Dunn & Crutcher LLP.

Last Friday, the Dallas-based Neiman Marcus Group filed for Chapter 11 reorganization in the bankruptcy court of the Southern District of Texas, whereby key lenders — TPG Specialty Lending, Pimco and Davidson Kempner Capital Management — would provide debtor-in-possession financing and exit financing in exchange for a controlling equity stake in the company, thereby perpetuating Neiman Marcus Group as an independent operation with a greatly deleveraged balance sheet.

However, given the impact of the pandemic and Neiman’s having no stores reopened yet and burning a lot of cash, questions are being raised as to whether the reorganization that’s proposed is the best remedy for the bankrupt company.

“Neiman’s is burning through millions of dollars and creditors are panicked,” said one source close to the situation. “Neiman’s is burning cash in a quick and large way because unlike Macy’s, they’re paying rent, paying vendors, and they haven’t opened any stores yet. The creditors are panicked that if they don’t sell the company, this could up end in a liquidation. This wouldn’t be happening if we weren’t in the middle of a pandemic.”

At its first bankruptcy court hearing last week, Neiman’s said the company could burn through $300 million by August.

HBC would seek to buy Neiman’s while it’s in bankruptcy because bankruptcy allows leases to be terminated with no penalty.

“The fact Neiman’s is bleeding cash means it needs to do something quick,” said one retail source, who thinks the odds are 50-50 that Neiman’s gets sold, is less likely to liquidate, and even less likely to operate under the ownership of the lenders, who have proposed supplying the DIP and post-bankruptcy funds.

In its letter, a copy of which was obtained by WWD, Mudrick’s lawyers wrote, “We urge the independent managers to test the waters with respect to a sale of Neiman’s businesses…to a strategic buyer where significant synergies can be exploited and Neiman’s value can be enhanced. Indeed, Mudrick is aware of the interest Saks Fifth Avenue has expressed over recent years with respect to an acquisition of or merger with Neiman’s.”

The letter went on to say that Neiman’s and Saks are “highly complementary business models with significant overlap among consumers, vendors and geographic locations which provides an opportunity for significant synergies and value creation through a combination of both retailers.”

Mudrick made the case for selling Neiman’s to Saks by listing a host of possible cost savings and synergies that could be attained, leading to creating greater value in the combined entity.

“In total, Mudrick estimates $2.8 billion to $4.7 billion of potential value creation roughly half of which ($1.4 billion to $2.1 billion) is more efficiently realized before Neiman’s emerges through Chapter 11,” the letter said.

According to the letter and Mudrick’s analysis of the two luxury retailers, 22 full-line Neiman’s stores are located within 15 miles of a Saks store, of which 11 are in the same shopping centers. “These 22 locations represent 49 percent of Neiman’s current full line retail locations and account for 54 percent of the gross square footage.”

Mudrick pointed out that of the 22 locations, three are owned by Neiman’s, another six are owned but have ground leases, and 13 are leased.

Seven other Neiman’s department stores are in the same metropolitan statistical area (but greater than 15 miles apart) as a Saks store, providing further consolidation potential, Mudrick’s lawyers said in their letter to Neiman’s independent managers.

According to Mudrick, the 13 “duplicative” leased locations account for between $40 million and $50 million in annual rent and related occupancy costs which could be rejected in bankruptcy court.

Through store closures, Mudrick estimated that $150 million to $215 million could be saved, and that the nine “duplicative” locations owned outright or subject to ground leases are collectively worth $400 million to $550 million, which could provide “valuable financing for a buyer.”

Mudrick also estimated that additional synergies attained in marketing and advertising and corporate overhead and other areas represent an additional $300 million of annual savings.

Neiman’s on Wednesday had no comment on the letter.

Hudson’s Bay, or other potential Neiman’s suitors, could have different estimates on savings, synergies and potential store closings that would differ from Mudrick’s. Richard Baker, executive chairman of HBC, has made no secret of his interest in buying Neiman’s to create a luxury retail powerhouse in North America.

Also, it remains to be seen whether other creditors join Mudrick in advocating a sale of Neiman’s to a strategic buyer.

It’s also possible that the proposed new owners of NMG in the current reorganization plan decide to sell of some of NMG’s assets, such as Bergdorf Goodman or Mytheresa.com.

“We believe a business combination with a retailer with the pedigree and prestige of Saks will no doubt be the most value-maximizing path forward for Neiman’s and its various stakeholders, and we look forward to your prompt investigation and pursuit of such an advantageous combination,” Mudrick wrote.

At Friday’s hearing, Jennifer Hardy of Willkie Farr said that the independent managers had “broad corporate authority to investigate and analyze and importantly to make any decisions on behalf of the company with respect to any issue that they believe should be looked at…where a conflict may exist between the company and its shareholders or other insiders,” including the situation with Mytheresa, involving what at least one creditor has alleged was “fraudulently conveyed” to an asset outside of NMG in order to shield it from any recovery by creditors in the event of a bankruptcy.

Marble Ridge Capital’s attorney Ed Weisfelner, who chairs Brown Rudnick LLP’s bankruptcy and corporate restructuring group practice, argued at Friday’s hearing that Beilinson and Vogel are essentially beholden to NMG’s leverage buyout sponsors — private equity fund Ares Management and investment fund Canada Pension Plan Investment Board, which together took over Neiman’s in 2013 for $6 billion.

Vogel is the managing member at Vogel Partners LLC, a private investment and advisory firm, and earlier was managing director at Davidson Kempner. Beilinson is the managing partner of Beilinson Advisory Group, a financial restructuring advisory group focused on assisting distressed companies.

“As we will demonstrate, you heard reference to some newly appointed disinterested managers,” Weisfelner said at the hearing. “They only came on the scene at the end of April of this year, and as a matter of corporate governance, we believe they serve solely at the whim of the LBO sponsors.”

Jennifer Hardy of Willkie Farr, representing Beilinson and Vogel, disagreed during the hearing, saying that the managers are “completely independent and captive to no one in the capital structure” and that their duty is “solely to the estate.”

“They are recent appointees, but they have no predetermined views as to how the investigation should play out or what the ultimate resolution will be,” Hardy said. “They’d like to listen to all sides of the story in these cases and intend to cooperate and collaborate with all stakeholders as we move through the process.”