NEW YORK — Who’s buying whom?

With $120 billion of hedge fund money on the sidelines, strategic players flush with cash and ongoing market consolidation, retail — especially the luxury segment — is ripe for mergers and acquisitions. And in this perfect storm rolls waves of speculation, such as:

This story first appeared in the February 10, 2005 issue of WWD. Subscribe Today.

  • Liz Claiborne Inc., snapping up Ann Taylor Stores Corp.
  • Neiman Marcus Group doing either a secondary stock offering, a sale of one of its subsidiaries or even a purchase, perhaps making a run at Saks Fifth Avenue.
  • Federated Department Stores making a play for Neiman’s, or continuing in its talks to acquire May Department Stores.
  • J.C. Penney picking off pieces of May, with Federated or Nordstrom doing the same.

The murmur du jour is Claiborne eyeing Ann Taylor. A West Coast analyst said it would be “the biggest acquisition for Liz, but they would only do it if it meant accretion of the stock, since Paul Charron [Liz’s chairman and chief executive] is very price sensitive, and the bottom line is the benefit to shareholders.”

The market capitalization for Ann Taylor is around $1.62 billion. In comparison, Liz is a giant, at $4.64 billion. Liz’s latest acquisition was in January, when it grabbed C&C California for $28 million.

One investment banker on the East Coast observed, “With Liz three times the size of Ann, it could probably still pay a 10 to 15 percent premium, and still be accretive. But that would mean a deal that is almost $2 billion.”

The West Coast analyst, along with others at Wall Street firms in New York, said Wednesday that Liz had looked at Ann Taylor several years ago. Like the Federated-May merger dance, market buzz about a deal comes and goes with the seasons.

With Liz, sources said the supplier has on its agenda three acquisitions: a small company, which it did recently with C&C California; a medium-sized apparel firm, and a retailer. An announcement could come in the next few weeks.

Given recent deals, an apparel firm acquiring a retailer is not much of a surprise, especially following the out-of-the-box move by Jones Apparel Group to buy Barneys New York. What is surprising is the climate of merger and acquisitions. One investment banker in New York said, “What you have right now is a merger and acquisitions business that is so white hot. The M&A fever you see is not just on the fashion and retail front, but involves all industries.”

Regarding Ann Taylor, the contract of J. Patrick Spainhour, 56, the retailer’s chairman and ceo, is up this spring, according to one Wall Street source. Last week, the level of murmurs intensified when Spainhour didn’t provide comment in the company’s January same-store sales report as he usually does. Wall Street wondered what it could mean about his future at the specialty chain.

One of the bankers questioned whether it would make sense for Claiborne to buy Ann Taylor if Spainhour were to leave the company. “This would then be far different from Jones buying Barneys, where the current management team was kept in place.” He was referring to Barneys ceo Howard Socol signing a contract with Jones that keeps him at the helm of the upscale retailer for another three years, until Jan. 31, 2008.

Meanwhile, shares of Ann Taylor have been trading in the $23 range, which is closer to its 52-week low of $19.98 than its high of $31.43. The analyst on the West Coast said, “Ann could easily be closer to its high or even $40 a share. The Loft has high operating margins. The problem with Ann is that the company has been having problems on its execution, and the turnaround is not where it should be. Ann needs more on the management front, and Liz is the expert at that. It could be a smart move, but of course an acquisition by Liz would have to fit the financial needs of the Liz board.”

A Claiborne spokeswoman said the company does not comment on market rumors. A spokeswoman for Ann Taylor could not be reached for comment.

On the selling side of the retail rumor mill, Neiman’s is said to be the latest firm to jump on the bandwagon, exploring disposals of everything from Kate Spade to Bergdorf Goodman.

Neiman’s owns a 56 percent stake in Kate Spade LLC, which it acquired in February 1999 for $34 million. The Kate Spade brand first surfaced as a possible candidate for a sale in mid-2004. The explorative discussions were centered on how to value the business. Some of the questions raised were: Is Kate Spade a luxury brand? By whose standards? How does Kate Spade compare with a European luxury brand versus an American luxury brand? As an American brand, should it be considered “accessible luxury” and therefore in the same category as Coach?

Others brands under the Neiman’s umbrella include its 51 percent stake in Gurwitch Products, which distributes luxury cosmetics brand Laura Mercier, and home furnishings catalogue Horchow. But the eye-opener that surfaced three months ago was the possible sale of Bergdorf Goodman, said a credit source specializing in retail and apparel.

Sources, all with different degrees of familiarity with the Neiman’s properties and its overall business, requested anonymity either because of competing deals or ongoing relationships with Neiman’s.

An investment banker familiar with the Neiman’s operation was quick to point out that the retailer is exploring options to see which asset sale would provide greater shareholder value. He said selling Bergdorf’s wouldn’t normally make sense because its two stores — the flagship on Fifth Avenue and a smaller men’s store — give Neiman’s an incredible foothold in the New York market. However, he said if the luxury firm were keen on selling, then there’s no reason to wait since now is the “best time for a retail buyer.”

Another investment banker, who has counseled many high-end companies, said the Bergdorf’s business was a good complement to the core Neiman’s operation, and that its sale “wouldn’t make sense.” He explained that Neiman’s, if it sold Bergdorf’s, would then have to find suitable digs in Manhattan for a comparable presence in the New York market, which would be difficult to do since the flagship’s location at 58th and Fifth Avenue is a “premier” site. The caveat, of course, is the assumption that Neiman’s itself isn’t on the block.

The Bergdorf flagship, opened in 1901, has a gross store square footage of 250,000, while the men’s store that was opened in 1991 totals just 66,000 square feet. According to the company’s annual report for the year ended July 31, 2004, the lease for the main store expires in 2050. The much smaller men’s store has a lease that expires in 2010, with two 10-year renewal options. With Neiman’s total revenues at $3.55 billion for the year, Bergdorf’s contributed 10.3 percent, or $365 million, to the mix.

One nonfinancial source, also familiar with Neiman’s businesses, observed, “A contribution of close to $400 million is a significant sum for any company. The Bergdorf brand, besides giving Neiman a presence in New York City, provides enormous legs for the company.”

In the latest quarter, stores operating under the Neiman Marcus nameplate posted same-store sales gains of 10.6 percent, while comps at the Bergdorf Goodman stores rose 14.3 percent.

Some sources think a sale of one or more of its divisions could be gearing up Neiman’s for a stock offering. The Smith family, according to the latest proxy, owns 31 percent of Neiman’s voting shares and could be looking to capitalize on the retailer’s soaring stock price.

A retailer familiar with Neiman’s said, “There was always a feeling that the Smiths would flip the company if the stock got in the $50 to $60 range. Now it’s $70. The whole strategy has been to lift the stock price.”

Then again, some speculate Neiman’s might even be looking to buy — with Saks Fifth Avenue mentioned as a potential target. As reported, Saks Inc. might be looking at splitting up its Saks Fifth Avenue and Saks Department Stores divisions to maximize shareholder value.

“I would look at Neiman Marcus buying Saks Fifth Avenue, and a long shot is Neiman’s selling to Federated, in my opinion,” said one financial source. “I think the strongest possibility is Neiman’s doing a stock offering.”

Others dismissed a Neiman’s-Saks marriage, however. One former executive of Saks Fifth Avenue said Neiman’s buying Saks doesn’t make sense since the two retailers operate in many of the same malls, and that buyers from the two stores would be competing against each other for designer exclusives and early deliveries. An exclusive at one store would be at the expense of the other.

But the financial source said a Neiman’s-Saks combination would be doable if Saks shifted its strategy to offering more moderate merchandise than Neiman’s. However, recently, Saks has been trying to elevate its merchandise offerings, particularly in the accessory, jewelry and more contemporary arenas.

Then there’s Neiman’s as takeover bait — with the leading candidate being Federated.

Federated’s chairman and ceo, Terry Lundgren, once ran Neiman’s, still loves the business, and is said to be ready to make a big move that would change the retail landscape of America.

Although Lundgren has an adventurous streak and is looking to make his mark, he’s got to be careful where he takes Federated. Any major acquisition could take the retailer off the successful track it’s been on under his command. Key components of the strategy call for all of Federated’s department stores to drop their regional nameplates next month and assume the Macy’s banner solely, while Bloomingdale’s remains Bloomingdale’s and continues to expand.

In another bold move, Federated’s home business is being centralized, with the exception of Bloomingdale’s.

There’s an undercurrent of caution inside Federated, which, in the Nineties, got burned by buying Fingerhut. The company eventually took a loss from Fingerhut and sold it off in pieces to recoup some of its investment.

On the other hand, a Federated-Neiman’s deal would give Federated the premier spot in luxury retailing, and a balanced portfolio based on a good-better-best three-tier structure, with Macy’s the most moderate, Bloomingdale’s in the middle and Neiman’s on the luxury end.

For Federated, Neiman’s would be a cleaner and cheaper buy than May Department Stores, with which Federated has reportedly been in talks this year. Federated is interested primarily in the Marshall Field’s and Foley’s divisions of May to gain greater entry into the Chicago and Texas markets, where Federated currently has a limited presence. Federated could also spin off May’s Lord & Taylor division to a separate buyer, or sell off L&T’s real estate, which is largely owned by May.

Lately, it’s been quiet on the Federated-May merger speculation front, but retailers on Wednesday noted it could just be the quiet before the storm. May has a regularly scheduled board meeting Friday.

A May sale or breakup is regarded as a strong possibility. “The company has lost so much ground to the competition that it would be such a big effort to reclaim it,” said a former May executive.

The source said there are other players for May real estate. “J.C. Penney would love stores in the West. Penney’s is not as well represented there. They would also love to have Filene’s and Hecht’s,” to fill in geography where Penney’s has thin coverage.

Another reason why it might be interested is that buying pieces of May could bolster Penney’s limited cosmetics offerings. Companies such as Estée Lauder do a huge business with May and would not want to lose that volume. Last month on a conference call, Myron Ullman, Penney’s chairman and ceo, suggested that beauty is one category the company could eventually enhance. Penney’s years ago expressed interest in buying Marshall Field’s, Dayton’s and Hudson’s, which was later all consolidated under the Field’s nameplate, and then sold to May Co.

Nordstrom is also said to be interested in certain May locations.

However, it takes a long time to orchestrate a breakup involving different buyers, and in the case of May, it would be complicated considering its broad geographical reach and various regional nameplates.

As the May board considers a sale of the company, it also must find a new ceo to replace Gene Kahn, who abruptly left the company last month. That’s something industry sources believe must be acted upon soon. Candidates have been contacted, but May needs a marquee name to lift confidence on Wall Street and lift the morale of its team.

“May is in disarray. The dynamics have to change. The company needs somebody fast to reverse the kind of descent the company has been on for the last four or five years,” said the May source.

It’s not an easy search. There are only a handful of retail executives with the experience and talent required to turn May around, and the field is further narrowed due to the wide use of noncompete contract agreements at companies such as Federated.

The source added that May must seek a retailer, rather than someone from another industry, because an outsider would require a learning curve, which takes time, and May doesn’t have the luxury of time due to its continual loss of market share and declining profits.

Another person close to May Co. said the board is currently grappling with the question of what’s best for shareholders — fixing the company or a merger. “It may be better to have a merger. Other retailers are further ahead with stronger national nameplates, stronger technology, they’re ahead in national brands, ahead in proprietary brands. Having merchants based in St. Louis is another disadvantage, and Gene surrounded himself with his cronies from Filene’s,” a May division that Kahn ran prior to ascending to corporate.

“There’s a lot for a new ceo to take on at May. Anybody would have to put in a whole new team.”

So what’s fueling all the speculation about deals in the retail world?

“There’s a lot of money around and both the retail companies and the supporting apparel companies realize that there are economies of scale that are brought into bear through size, and that’s it’s imperative for them to continue to be competitive,” said Gilbert Harrison, chairman of Financo Inc. “There is no question that the high degree of speculation is based on the Sears-Kmart deal as well as the growing power that both Wal-Mart and Target have. Some of it is a buying frenzy. Some of it is speculation by the press. No deal should be driven by anything other than economic factors, competitive advantage, control of marketplace, ability to source, ability to pick up market share — otherwise a transaction will be a disaster.”

By Vicki M. Young and David Moin