INVESTCORP ITCHING FOR FAST SAKS SALE
Byline: David Moin / Valerie Seckler / Catherine Curan
NEW YORK — Investcorp is ready to cash out on Saks Fifth Avenue — and wants out fast.
For the Bahrain-based investment company, Saks has been a disappointing investment, one held too long in its portfolio.
Investcorp purchased Saks in 1990 and now has set a strict timetable, reportedly 45 to 60 days, to come up with a buyer. That will be tough, considering Investcorp is seeking a 30 percent premium on the stock, and the $900 million debt-load Saks carries on its books.
On Thursday, shares of Saks rose 2 11/16 to 27 1/2 on the New York Stock Exchange on news that the company is up for sale. It has traded between 18 5/8 and 27 1/4 over the past 52 weeks.
If no buyer is found, a secondary offering will be inaugurated, sources said.
Investcorp holds about 60 percent of Saks’ shares, as well as three seats on its eight-member board. Saks management owns about 10 percent of the stock, including options. About 450 of Saks management personnel are owners.
“Investcorp is frustrated with the valuation,” said Holly Guthrie, analyst at Janney Montgomery Scott, adding that Saks’ stock is “selling below the competition, and the market hasn’t realized the full value of the company.”
She said Investcorp’s time horizon has been stretched, and that venture investors usually look to cash out within five years.
With its stock lagging for the past year, Saks called in Merrill Lynch and Goldman Sachs for advice and was told to move fast to try to capitalize on the chain’s good first quarter and the strong stock market.
Janet Joseph Kloppenburg, an analyst at BancAmerica Robertson Stephens, said she also believes Investcorp has been frustrated by the valuation while watching acquisition fever overtake the retail sector and other industries. She expects a reasonable purchase price to be about $35 to $36 a share, or 1 to 1.5 times 1998 sales, which are projected to be $2.5 billion.
Others, however, said that would be a high price for Saks to command, and noted that recent retail deals haven’t been as rich. Proffitt’s, which is among those thought to be interested in Saks, bought McRae’s for 80 percent of sales in 1994. It purchased Younkers for 50 percent of sales in 1996, and Herberger’s for 67 percent of sales last year.
May Co. acquired Wanamaker’s for 86 percent of sales in 1995, and Strawbridge & Clothier for 82 percent of sales in 1996; Federated Department Stores’ deal for Macy’s in 1994 was at 80 percent of sales.
As Walter Loeb, retail consultant, noted, “Saks would be expensive, and Saks management has stressed that a deal may or may not be done. But if you look at Investcorp, they would like to liquify, to take advantage of other opportunities.”
“Most department stores don’t command between one and 1.5 times sales,” said Todd Slater, analyst at Lazard Freres. “The best of those deals tend to bring 75-100 percent of sales. In the go-go Eighties, retailers sometimes got 1.5 times sales. To suggest a big premium [for Saks] seems to fly in the face of recent patterns.”
However, Philip Miller, Saks chairman and chief executive officer, told WWD Thursday that this is the time to sell.
“This process is being undertaken to enhance value for all Saks shareholders,” he said. “It was a strategic decision by Saks’ board of directors which Brian [Kendrick, vice chairman] and I fully participated in and endorsed. The board believes the right time to explore alternatives is from a position of strength, with our growth plan working and our performance on track, and that’s exactly what we are doing.”
Others said Investcorp’s Middle Eastern shareholders were getting impatient with the lagging stock. According to sources, Saks has been talking to potential buyers for the last three to four weeks and several companies are examining the books on the chain, which has 41 full-line stores, eight resort stores, seven Main Streets and 39 Off-5th outlets.
In addition to Proffitt’s, other parties reported to have some degree of interest include Neiman Marcus Group, Gucci, Prada, LVMH, Pinault-Printemps-Redoute and Limited Inc.
As for Neiman Marcus, one source close to the organization said, “The people at Harcourt General [Neiman’s parent company] are very frugal and would bite only if they were certain the deal would work.”
Some sources said that while many companies might be interested in looking at Saks’ books — including Federated Department Stores and May Department Stores — only a handful might be serious.
Federated and May Co. declined comment Thursday. So did Neiman’s. Proffitt’s could not be reached for comment. Nordstrom — one of Saks’ major competitors — has the resources to buy the chain, but market observers discount the likelihood that the Seattle company would be interested, citing its conservative business approach.
For Neiman’s, buying Saks would mean dominating the upscale market. It would give it enormous clout with designers, allow it to control prices better, and permit the closing of several weaker Saks stores. The two chains share a total of 16 sites in malls or downtown locations.
Market sources are discounting the possibility of individual investors coming forth, considering the enormous amount of money needed to complete a deal. A retailer that bought Saks could save money by folding it into existing operations and gaining buying influence.
“I believe a strategic buyer would be better able to get the debt under control than a non-strategic buyer,” Slater said. “They could take a substantial amount of overhead out of Saks’ back office, right away.”
Analysts pointed out that Saks’ highly leveraged balance sheet could compel Investcorp to settle for a merger through a stock swap, rather than an outright purchase of the company for cash and assumption of debt.
On Jan. 31, the end of Saks’ fiscal year, the retailer’s long-term obligations of $875.6 million nearly equaled its shareholders’ equity of $879.9 million. At the close of Saks’ first quarter May 2, long-term debts had grown to $929 million while shareholders’ equity eased to $884 million.
In a stock swap scenario, said analysts, Saks shares would need to trade in the upper 30s for Investcorp to realize one to 1.5 times sales.
“You have to wonder why [Investcorp] put a ‘for sale’ sign on Saks,” said an analyst who covers the upscale retail market. The analyst, who requested anonymity, added: “It suggests they’re hoping that someone will come out of the woodwork and create some value. But with the scaled-down number of potential buyers because of the turmoil in Asia, I don’t expect a bidding war.”
Saks, with $2.2 billion in sales last year, has improved its performance recently. That’s attributed to its effort on getting its best and most affluent customers to buy more by offering more incentives, and by strengthening its “loyalty” program.
Its Fifth Avenue flagship continues to grow in volume and attract a huge tourist audience, many from abroad. Moreover, the chain’s expansion — primarily in New York, California, Texas and Florida — has given it a bigger pencil, facilitating more aggressive buying of new lines. However, several fashion and retail experts described the buying as sometimes “indiscriminate.” Some additions — a Carolyn Roehm “at home” collection, and a shop combining home and apparel by Ines de la Fressange — have flopped, but the store’s investments in these collections were minimal.
More significantly, in its battle against Neiman’s, Saks has made headway building a formidable business in bridge sportswear, as well as cosmetics and fragrances. Its flagship here provides a high-profile launch pad for new lines, especially cosmetics and fragrances. The flagship is also considered strong in special occasion dressing, men’s wear, and designer sportswear and dresses.
The chain’s acquisition of several I. Magnin sites in California in 1994 enabled Saks to gain substantial share. Its performance there was closely watched by the market. With business growing, it sent a signal to vendors that it could sell upscale goods beyond the New York flagship, and designer goods started flowing into more branch locations, such as Atlanta. However, the Saks branch system still has many weak spots, particularly in secondary markets. But its renovations in key locations, including the Fifth Avenue flagship, and the Atlanta, Boston, Cleveland, Beverly Hills and San Francisco stores, have been fruitful, although there is still about 40 percent of the Saks real estate that requires capital investment.
About 60 percent of the square footage has been overhauled over the past five years, and in the process sales per square foot have jumped from $275 to $375. The goal is to pass $400, approaching the higher levels achieved by Neiman Marcus and Nordstrom, Saks’ two primary competitors. Significantly, Neiman’s continues to strengthen its grip on the luxury customer, beating up Saks — outside metropolitan New York — in such categories as men’s clothing, designer jewelry, precious jewelry, designer and couture ready-to-wear, decorative home and gifts. Neiman’s pricing seems steadier, with Saks far more promotional.
Also, Neiman’s stores generally offer a higher level of service, with sales associates said to have better rapport with customers. Saks has also lost some strong people, notably Rose Marie Bravo, the former Saks president who became ceo of Burberrys Worldwide this year. A new executive vice president, Jeanne Daniel, a former Tiffany’s executive, has taken on Bravo’s merchandising responsibilities, an appointment that surprised the industry because Daniel had no apparel experience.
Rumors had been circulating for weeks that Saks was up for sale, but analysts who met with Saks’ top management last week — the company’s first such meeting since going public in 1996 — said the retailer’s executives did not breathe a word of it.
Saks wasn’t saying much Thursday beyond its formal announcement that it is exploring “strategic alternatives, including the possible sale or merger with a select group of targeted companies.” Saks did not elaborate on what “targeted companies” it might have in mind.
Thomas Tashjian of Montgomery Securities raised the possibility that May Co. and Federated Department Stores could be interested, but he also mentioned Sears, Roebuck, J.C. Penney and Dayton Hudson. Such a purchase would fit well in the portfolios of all three, he said. It would allow Dayton and Penney to upgrade some of their stores to the luxury sector. Sears chairman Arthur Martinez was formerly vice chairman of Saks. Tashjian estimates the purchase price at $34 a share, or equal to 1 times 1998 sales. He said the price tag limits the number of potential buyers. Larger chains, therefore, are more likely to be able to afford it. Analysts said Saks’ stock has been low compared to other retailers because the company posted disappointing results during the first and second quarters last year, shaking investor confidence. Now, however, said Tashjian, Saks’ business has stabilized and the chain is in better shape. As for LVMH as a potential suitor, Kloppenburg pointed out that its chairman, Bernard Arnault, has stated his ambition to acquire stores, and said Saks has the advantage of not being in the economically troubled Far East.
“LVMH is getting hurt by Far Eastern exposure right now,” she said, adding that Saks would be “right up their alley” because it is high-end. Arnault emphasized his interest in retail at the group’s shareholder’s meeting here on June 9, and once eyed Barneys New York. The group is looking to expand its DFS and Sephora presence in the U.S. in part to offset exposure to the Asian market.
Also at the shareholder’s meeting, Arnault announced that Le Bon Marche — the Left Bank retailer that owns the Franck et Fils specialty store and is also a holding company — would be transferred by stock swap into LVMH to become a retail division. That could be a move to create a retail entity to pursue deals.
Not everyone sees LVMH as the leading off-shore contender. Other foreign players cited by analysts would be those least affected by the Asian financial crisis: Harrods or Vendome.
Pinault-Printemps-Redoute chairman Serge Weinberg has also expressed interest in American retailing, but mainly mail order. His group purchased catalog company Brylane this year.
Weinberg, however, has not mentioned any interest in stores outside France.
But Francois Pinault, who controls PPR through Artemis, has been on a purchasing binge. His recent buy of Christie’s was page-one news, and he controls or owns such top American labels as Converse and Samsonite.
The timing of Investcorp’s move to market Saks was generally seen as favorable by Wall Street, because not only is the Saks name a valuable one, but upscale retailing is regarded as a strong growth market in the U.S.
Saks, as reported, estimated to analysts this week that its earnings will grow 25-30 percent annually through 2000, while sales are seen rising about 12 percent a year. However, some analysts questioned how Saks would pull off those profit gains with the top line growing at about half the rate.
“I’m not surprised by Investcorp’s move,” said Otto Grote, analyst at Derby Securities. “The Eighties was the decade of apparel stocks, and the Nineties is the decade for the stocks of home [goods] retailers.
“There continue to be too many stores, relative to the demand for apparel,” Grote added. “Another issue is the strong dollar. It has become very expensive for tourists to come here and shop, and this clearly impacts Saks. I believe these are considerations compelling Investcorp to unload.”
