Is Richard Baker getting closer to his dream of snapping up Neiman Marcus Group?
As Neiman’s gets set to report its fourth-quarter and year-end figures today, speculation is growing that Baker is casting a closer eye on the luxury department store retailer. And the timing might be appealing given that Neiman’s valuation has slipped from the heights of a few years ago given the challenged luxury market.
HBC declined to comment, as did NMG.
But Baker, HBC’s governor and executive chairman, has made no secret of his desire to one day buy Neiman’s, and HBC would be a strategic buyer since it already owns Saks Fifth Avenue. There has been recent speculation that HBC has been in the capital markets lining up the financing to buy Neiman’s, but sources said no deal is in the works right now.
“HBC is always in the capital markets. They’re always borrowing against buildings,” said one source, suggesting that may have jump-started the latest round of rumors.
Regardless, that hasn’t quelled the idea that the time might be getting closer for Baker to make a move.
“It’s a difficult environment for luxury and it makes a lot of sense for the two to combine into one,” said one former luxury chief executive officer, who requested anonymity. “Everyone believes it’s going to happen. They’re just wondering when it’s going to happen. They’re fighting one another in a dwindling market.”
In buying NMG, HBC could realize millions of dollars of cost savings and synergies attained by eliminating duplicative functions, such as accounting, planning, human resources, legal, distribution facilities and online teams.
HBC could further take out costs by closing some stores around the country. Neiman’s is said to have a couple of units that run weak in good or bad times, though generally it has bigger and better locations than Saks, to support dominant designer presentations.
Aside from cost savings, HBC would pick up some buying clout over vendors. They wouldn’t be happy with HBC owning Saks and Neiman’s, though vendors today are in stronger positions vis-a-vis retailers than they used to be. Designers are less dependent on generating revenues through Saks and Neiman’s, having opened their own shops and web sites and having the ability to sell to a rising number of fashion web sites.
“If Saks bought Neiman’s, they would have to stay differentiated,” said the luxury source, who suggested Neiman’s could sharpen its focus on high-priced designer and selling the most affluent consumers, while Saks could take a sharper focus on accessible luxury.
Baker, who cut his teeth in real estate before catching the retail bug, could draw money out of HBC’s property portfolio to help fund a Neiman’s acquisition — which would eclipse the $2.9 billion HBC paid to buy Saks or the $2.73 billion for Galeria Kaufhof in Germany.
Last year, HBC partnered with Simon Property Group Inc. in the HBS Global Properties Joint Venture, which owns properties in the U.S. and Germany. HBC contributed 42 owned or ground-leased properties, including the Saks Fifth Avenue Beverly Hills flagship and the Lord & Taylor stores in Westchester and Manhasset, N.Y. The time to monetize that venture by forming a REIT could be nearing given that low-interest rates have helped charge up the real estate market, which is increasingly accepting of new types of entrants.
Baker has executed some savvy real estate deals, including buying Hudson’s Bay Co. for about $1.1 billion in 2008 and subsequently selling off most of the real estate of HBC’s Zellers division for $1.8 billion to Target. Years later, he sold the Hudson’s Bay flagship on Queen Street in Toronto for $650 million to Cadillac Fairview.
HBC’s Saks flagship in Manhattan has been appraised at $3.7 billion, but the firm has a $1.25 billion, 20-year mortgage on the ground underneath it. The Lord & Taylor flagship in Manhattan has been appraised at $655 million and was recently refinanced. HBC has a $400 million, five-year mortgage maturing in August 2021 on that property.
The refinancings reflect HBC’s strategy to unlock value in its retail real estate holdings, to pay off debt and help finance acquisitions, though it does create rent obligations.
Neiman’s is not that real estate rich. As of its last annual report, the retailer had 41 full-line stores, only six of which were owned outright. Eleven more were owned buildings on leased land and the largest part of the chain, 17 stores, were leased.
Baker has become a much larger player in the retail space in recent years with a good track record and experts said he could put together some kind of deal and borrow enough even though there isn’t lots of real estate to turn to at Neiman’s.
Then there’s that other jewel in Neiman’s crown — Bergdorf Goodman, but it doesn’t own the real estate there. The Bergdorf building on Fifth Avenue is owned by the Goodman Family Trust and their asking price wouldn’t be cheap — some observers have put it in the $2 billion range.
Nonetheless, Bergdorf’s is seen as very desirable and sources have said it is an asset Baker would want to keep.
Other names have also surfaced as potential buyers of Neiman’s, including LVMH Moët Hennessy Louis Vuitton, sovereign Middle Eastern funds, and Galen Weston, who through various holding companies owns or controls Loblaws and Holt Renfrew in Canada, Brown Thomas in Ireland and Selfridges in the U.K., among other businesses. LVMH declined to comment on the rumor.
But there is still the issue of valuation for Neiman’s current owners, Ares Management LLC and the Canada Pension Plan Investment Board.
The two funds paid $6 billion for Neiman’s in 2013, or 9.6-times earnings before interest, taxes, depreciation and amortization of $623 million — a high price tag that raised eyebrows across financial and fashion circles. NMG was purchased from TPG and Warburg Pincus, which paid $5.1 billion in 2005.
Even applying the same multiple — which would be ambitious given the state of the market today — Neiman’s projected EBITDA for the last fiscal year has its value declining from when the company last traded hands. A more realistic selling price right now would be much closer to the retailer’s debt level of $4.8 billion, theoretically leaving the company’s backers with no equity and a loss on their investment.
“They wouldn’t want to try to sell it now with these poor results because they would only get lowball offers,” said one debt expert. “They are spending a lot in [capital expenditures], so no free cash flow to use to reduce debt. So, leverage [or how much debt the company is using] will only come down with an improvement in EBITDA, which has been elusive, given poor mall traffic, poor tourist traffic in gateway cities, and currency problems.”
According to Capital IQ, Neiman’s has a debt to EBITDA ratio of 8.1-times, well ahead of benchmark Nordstrom at 1.9-times; Macy’s at 2.4-times, or HBC, at 6.4-times.
The debt expert speculated Ares could wait to sell NMG until Neiman’s cuts the ribbon on its Hudson Yards store — its first in New York — expected to open in 2018 with great fanfare and potentially a tool to court the investment community for a sale deal or for favorable terms as it seeks to refinance its asset backed credit facility that year. Bergdorf Goodman, which is owned by NMG, could also be helpful in enticing the financial community, considering its ongoing renovations aimed at increasing the value of the business and its worldwide appeal.
The question of what Neiman’s is worth makes today’s year-end figures that much more important.
For the first nine months of the fiscal year ended July 30, Neiman’s logged adjusted EBITDA of $520.4 million, down from $602.7 million a year earlier, and saw $215.9 million of that go to interest payments to manage the firm’s debt.
Bond traders reading the tea leaves are looking for fourth-quarter adjusted EBITDA of anywhere from a little more than $80 million to just over $100 million — down from $108 million a year ago and $111 million a year before that.
While not the bottom-line on the company’s profit and loss statement, EBITDA is important because it’s the pool of money used to service debt and also the barometer helping to put a price tag on the company.
“The fashion business is not strong. It would be hard to get a good deal. Three years ago, Neiman’s was worth a lot of money. It’s probably worth 60 percent of that now,” said a former luxury executive who requested anonymity.
“The crux of the story is, debt starts coming due in 2018. Time is running out. They’ve got to fix the business and improve sales to refinance,” said a retail source familiar with the situation. Neiman’s asset-backed revolving credit facility matures in October 2018 and its senior secured term loan comes due in October 2020, with other debts maturing in 2021 and 2028.
Current issues aside, few retailers are as celebrated as Neiman Marcus Group, with its glamorous aura, culture of putting the customer and innovative merchandising first; industry-leading sales per square foot rates; extravagant, over-the-top Christmas catalogues, and its posh Bergdorf Goodman emporium in the heart of Manhattan. Neiman Marcus Group also operates Mytheresa, Cusp, Horchow and Last Call.
To work through the climate, the Neiman’s team has been clamping down on expenses, including payroll and compensation, sharpening the focus on issuing chargebacks, returning merchandise to vendors to manage inventory levels, and stepped up on the price promoting in recent seasons.
Ares and the pension plan indicated intentions to exit at least part of their investment in August 2015, when they filed for an NMG initial public offering. But the timing was bad with the stock market in turmoil then, business being challenging, and the Chinese devaluing the yuan shortly after the paperwork for the offering was filed, spooking the global market. The process was shelved shortly after.
“There’s no impetus for Ares to go out and do something today,” said one financial source, pointing to the sagging EBITDA and the relative short period of ownership. “It’s a selling issue. Why would Ares say, ‘I’m just going to try to get out of this.’ They’ve only been in it for three years.”
Private equity players often hold on to big investments for five to seven years, working to build up businesses and value before cashing out.
It’s feasible to put two competitors, Neiman’s and Saks in this case, under the same corporate umbrella. “It happens all the time. Bloomingdale’s operates with Macy’s and you see it in consumer product companies,” one source said. “My guess is that Baker can figure some financial way of coming up with money. The question is what price? Business is not as good. The multiples have come down. It’s hard to justify paying $6 billion. They are probably not going to want to sell it at a loss. They haven’t owned it that long. Private equity guys tend to hold for longer.”
So the question is whether Baker or any other potential buyer decides to strike soon — or waits and bets on the luxury market continuing to struggle and Neiman’s valuation perhaps slipping further.