NEW YORK — In its bid to buy Saks Fifth Avenue, Hudson’s Bay Co. faced competition right down to the wire.

This story first appeared in the July 31, 2013 issue of WWD. Subscribe Today.

According to sources, Neiman Marcus Group, working with private equity firm KKR & Co., was back in the running for Saks as late as last week, after an earlier pursuit that fell flat. The second time around was a more compelling offer, sources said, but Saks nixed Neiman’s because a government antitrust investigation of a Neiman’s-Saks combination would have delayed a deal for months and caused administrative burdens for both retailers considering the enormous documentation that would have been required by the government.

Saks kept a tight lid on its negotiations with Neiman’s and did not inform HBC that it had competition. The negotiations underscore the industry’s growing perception that a Neiman’s and Saks merger is viable. And it raises an intriguing scenario: Could HBC eventually make a play for Neiman Marcus?

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Sources speculated that HBC’s chairman and chief executive officer Richard Baker has a vision to continue his retail buying spree to create a luxury empire that would have sales of more than $11 billion with the addition of Neiman’s.

In 2006, Baker’s NRDC firm bought Lord & Taylor. Two years later, NRDC changed its name to Hudson’s Bay Co. after buying the Canadian business. It is likely to take at least two or three years for Baker to both consolidate Saks into HBC and pay off the debt from the deal before he could launch a bid for Neiman’s, which is owned by TPG and Warburg Pincus. The owners intend to take Neiman’s public or get it sold, although the timing of an offering has not been specified. Combining Neiman’s with Saks would have been a back door way to take Neiman’s public.

The virtues of a Neiman’s and Saks merger have been long debated in the industry. Some experts believe there is a lot of logic to it, considering the possibilities for synergies, consolidations, increased buying clout and sharing best practices. Others say there is too much geographic and merchandise overlap between the two luxury chains and that the store cultures are different. Wall Street sources said Tuesday that it was highly probable that Neiman’s would have made another attempt at Saks given the $16 share price HBC has agreed to pay for the retailer, which some believe was not high.

“Neiman’s was involved right up till the end,” said one source familiar with the situation. “There were extensive discussions for a deal to put Neiman’s and Saks together. The board [of Saks] didn’t want it because of the risk of regulatory approval.”

The source added that while there was little question that the government would approve the combination, Saks didn’t want to postpone a deal since it had a bird in hand in HBC. On Sunday, “Project Sally,” the internal code name for Richard Baker’s quest to buy Saks Inc., came to fruition. HBC signed the definitive agreement to buy Saks for $2.9 billion, including debt, in a deal expected to close in three to six months.

KKR made an unsuccessful play in May to buy Saks and combine it with Neiman’s. It is unclear whether KKR remains interested in the company now that a definitive deal with HBC has been signed. A KKR spokeswoman could not be reached Tuesday.

Saks has set a 40-day “go-shop” period where new bids can be entertained, but Saks has already said it does not expect any new bids to come in.

Investors were at least open to the possibility that a new bid could come and pushed Saks’ stock as high as $16.11 Tuesday, before it closed up 7 cents at $16.02.

Baker told WWD Monday that Hudson’s Bay has a “perpetual right” to match a competing offer and would receive a break-up fee if Saks went with another suitor. “Someone would have to do a lot of work and spend a lot of money” to beat his offer, Baker said.

Regulatory filings put the break-up fee at a range of $40.1 million during the go-shop period, and $73.5 million afterward.

Shares of HBC continued to gain ground Tuesday on the Toronto Stock Exchange. The stock rose 2.6 percent to 17.90 Canadian dollars, or $17.42, after gaining 5.8 percent Monday.

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