Byline: Thomas J. Ryan / With contribution from Sharon Edelson

NEW YORK — The collapse last week of shares of Saks Holdings Corp. has complicated the retailer’s bid for Barneys Inc., but Wall Street analysts said Saks still has time to prop up its stock price.
Meanwhile, the currently depressed levels of Saks stock is good news for competing bidder Dickson Concepts and other potential suitors, especially Neiman Marcus, which has yet to weigh in with a bid.
Since the value of Saks’ stock has become less attractive, Saks would likely need to put more cash behind its $290 million offer for Barneys.
Saks’ deal currently is half stock but involves various other provisions that could push the deal’s value up to $350 million. One provision includes a $50 million payment to Isetan Co. Ltd. for rent reduction and new leases on the Barneys stores in Beverly Hills, Chicago and on Madison Avenue, as well as for the settlement of Barneys-Isetan litigation.
Saks has told the Wall Street community that it would only enter into a transaction if it were to add to earnings per share, but at the current price of Saks stock, that would be tough.
Shares of Saks fell 9 5/8 to 19 3/4 on the New York Stock Exchange last Wednesday, after Saks announced a disappointing first-quarter earnings forecast. The shares slipped another 1/4 point last Thursday, rose 1/2 last Friday, but slid again 1/2 to close at 19 1/2 Monday.
Prior to the downward earnings outlook, many analysts were strongly recommending the purchase of Saks, predicting the stock would rise to the early-40s level over six to 12 months. Several analysts downgraded the stock to neutral after the disappointing earnings forecast.
Saks is telling analysts that a deal for Barneys could be completed as early as the third quarter but may drag on to the first quarter of 1998.
Since going public at 25 in May 1996, Saks has traded as high as 41 1/4 and as low as 19 3/8.
“Saks’ currency in terms of its stock is certainly depreciated, and they’d have to pony up a lot more in shares in a bid for Barneys,” said Lawrence Leeds Jr., a retail analyst at Buckingham Research.
Leeds said that if the stock does not revive, Saks would not want to hand out as many shares in a Barneys bid at the current depressed prices and would put more cash into its offer.
However, Saks, still heavily leveraged, ended last year with only $40 million in cash on its balance sheet.
“From a conceptual point of view, the acquisition seems to make sense for Saks,” said Harry Ikenson, a retail analyst at Rodman & Renshaw. “Their biggest problem seems to be Off-Fifth. Maybe they’re doing too many things at once.”
Saks’ stock fell after the retailer said first-quarter earnings would come in at about 20 cents a share, down from previous Wall Street estimates of 33 cents.
The retailer blamed the disappointing forecast on poor performance at its Off-Fifth units and Folio catalog, and sluggish sales in casual bridge apparel. The company told analysts it didn’t have enough inventory at the Off-Fifth units and didn’t know if that problem would be fixed right away.
Janet Kloppenberg, a retail analyst at Robertson Stephens & Co., noted that the Off-Fifth division accounts for 10 percent to 11 percent of total revenues and comps are slightly negative, while Folio has been down significantly for four months.
The big question mark for a Saks bid is Investcorp, the deep-pocketed Arab investment giant that controls a 65 percent stake in Saks. Specifically, will Investcorp put any more money into Saks in order to recoup its investment?
Investcorp paid $1.6 billion to acquire Saks in 1990 and put in another $300 million equity infusion to shore up the business in 1992. Since going public, clients of Investcorp have earned $250 million from selling shares in Saks in a secondary offering in September 1996. At its currently depressed stock price, the market value of Saks is $1.3 billion.
Investcorp, which earned over $1.5 billion in selling its ownership in Gucci over the last two years, declined to comment on the Saks situation.
Market sources have indicated that Investcorp supports Saks management and its pursuit of Barneys as long as the transaction makes sense and is nondilutive to shareholders. “Obviously, Investcorp wants to be as helpful as possible,” the market source said.
For Neiman Marcus, shares are now trading in the mid-20s, representing a 25 percent premium over Saks’ current price. Although NMG’s stock price is depressed from levels reached last year, the higher stock price means Neiman’s would have to fork over fewer shares in a likely stock-heavy bid for Barneys.
Neiman Marcus stock on Monday dipped 1/4 to 25 1/4 on the NYSE. In October, when it was first learned that Neiman’s was looking into making a bid, both Neiman Marcus and Saks were trading in the mid-30s. Neiman Marcus’s 52-week high is 36 1/4 and its low is 19.
The collapse of Saks’ stock makes Hong Kong-based Dickson Concepts’ $240 million all-cash bid for Barneys more attractive. Dickson is expected to up its offer if the bankruptcy court approves a $10 million breakup fee as part of a bidding process. The breakup fee issue is expected to be decided by Judge James L. Garrity in court on Wednesday.
Of course, this could all blow over if Saks is able to turn around its stock. If Saks comes back with a bang-up second quarter to restore Wall Street’s faith, the stock could be on an upward trajectory.
While Wall Street dealt Saks a swift blow last week, analyst were quick to defend the company’s management and describe the retailer as well run.
“You should not take it to mean that Saks is slipping,” said Howard Eilenberg, a retail analyst at Johnson Redbook Service. “I think they have a good management there and they probably should do well going forward. The economy is still strong and demand for better merchandise is certainly manifest in other upscale retailers. Certainly for the balance of the year, upscale merchandise is going to continue to be in demand.”
“The Saks franchise still rests on the very strong foundation that has been built over the last couple of years,” said Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates. “The current stock price is not in proportion to the long-term strength of the Saks franchise.”
They also continue to support an acquisition of Barneys by Saks or Neiman’s. “I think both companies can tap into synergies with Barneys and can use a younger customer that Barneys has,” Buckingham’s Leeds said.

load comments
blog comments powered by Disqus