SAKS, ISETAN OFFER CLOSE TO $350 MILLION TO PURCHASE BARNEYS
Byline: Vicki M. Young / With contributions from David Moin
NEW YORK — Move over, Dickson Poon. Here comes Saks.
In a move that topped the Dickson Concepts offer by $50 million, Saks Holdings and Isetan Co. signed an agreement Tuesday afternoon to buy Barneys Inc. for $290 million to $300 million, subject to adjustments.
Robert Brundige of Hughes Hubbard & Reed, an attorney for Isetan, said the total amount of the deal is around $350 million, with $50 million going to Isetan for a reduced rent consideration and the rest to buy the Barneys estate.
Brian Kendricks, chief financial officer of Saks, said the $50 million would be in cash.
“Isetan is a very strong partner, and we are very happy to do the deal with them,” said Kendricks. “Our role now is to go out and sell the plan so that we can bring some sort of closure to the bankruptcy.” Barneys’ creditors were reportedly irate over the bid, which would give them about 20 cents on the dollar, with the rest going to Isetan. The bid by Dickson, although lower, offers less to Isetan. How much it offers the creditors is not immediately clear.
The Saks agreement is strictly a financial deal and does not indicate a new management structure or discuss the fate of the Pressman family, which now owns and operates Barneys.
While analysts favor a Saks-Isetan purchase of Barneys, there are many hurdles left, among them the possibility that Dickson or some other bidder comes up with a higher offer, or that Barneys convinces its creditors it can put together a better deal at a different price.
Isetan, meanwhile, has resigned from the creditors’ committee, which might or might not have to do with the negative reaction to the Saks bid. Isetan’s resignation could also be to avoid a conflict of interest.
“The Isetan proposal is a lopsided reallocation of claims to enrich Isetan at the detriment and expense of the creditors,” a source close to the creditors’ committee said Tuesday. “This tactic will fail and the creditors will vigorously oppose such maneuvers.”
Barneys said in a statement on Tuesday that it is reviewing the Saks bid, which will be submitted to bankruptcy court for approval. Counsel for the creditors’ committee declined comment Tuesday, stating that it would meet with Barneys today to review the bid.
However, Saks and Isetan said in a joint statement: “We believe the Saks-Isetan joint plan offers a global settlement to, and is the most viable resolution for, all parties in the Barneys bankruptcy. It is a significant increase over the prior [Dickson Concepts] publicly announced offer. The combination of Saks and Isetan represents the strongest possible pairing of retailing and real estate expertise.”
Isetan also stated that it agreed to the plan despite accepting rents “substantially below current market rates and the existing lease rates” and will take a “significant loss” on its $200 million in emergency loans to Barneys.
In addition, Isetan said it might hold discussions with other investors interested in Barneys, meaning the agreement with Saks does not foreclose another deal with another party.
Dickson Poon, chairman of Dickson Concepts, declined comment Tuesday on the Saks-Isetan development.
The source close to the committee said that Federated Department Stores signed a confidentiality agreement with Barneys a couple of weeks ago, but another source said that doesn’t necessarily mean Federated will emerge as a bidder. The retail giant could simply be interested in getting an inside view of the Barneys operation. Federated declined comment Tuesday.
As reported in these columns Friday, Saks reached an agreement with Isetan last week to jointly pursue Barneys. Saks said the agreement was signed Tuesday afternoon. Bids for Barneys must be submitted by May 8, and Barneys expects to reach a deal by May 28.
Saks’ cash-and-stock bid gives Isetan $50 million as consideration for rent reduction for the three flagships in Beverly Hills, Chicago and on Madison Avenue, according to sources. Annual rent for the flagships have been renegotiated to around $15 million from the current annual rate of $23 million.
The deal between Saks and Isetan would effectively settle the dispute between Barneys and Isetan over Isetan’s status as landlord.
However, Isetan would still lose a substantial chunk of the $600 million in loans made to bankroll Barneys’ expansion, including the unlikelihood of ever collecting on a state court judgment for more than $203 million in emergency loans, including interest, that were personally guaranteed by Gene and Bob Pressman, Barneys’ owners and co-chairmen.
According to Saks’ Kendricks, Isetan would get $165 million unsecured claim against the estate of Barneys and Barneys America, the entity created to open stores in shopping malls.
One silver lining for Isetan, though, is the $15 million rent negotiated between it and Saks. That amount is higher than the reduced interim $9 million rent payment Barneys has been paying and higher than the $10 million Barneys has been claiming is fair market value.
Still up for negotiation are the Asian licensing rights, which Isetan now holds. Those rights allow Isetan to operate Barneys stores throughout Asia. Isetan already operates two Barneys Japan stores, in Tokyo and Yokohama, as well as an in-store shop in an Isetan department store in Singapore. A source familiar with the transaction disclosed that Isetan, at the very least, would retain a regional right to operate Barneys in Japan.
Despite Tuesday’s announcement, many twists and turns remain in the Barneys bankruptcy. One of them is that the Neiman Marcus Group, which has been in discussions with Barneys and Isetan, could make a bid now that Saks has put its bid on the table. However, Neiman’s is said to be less interested in Barneys than Saks is and has said it would not get into a bidding war for Barneys.
In addition, Dickson Concepts, whose $240 million cash offer on Feb. 28 was promptly rejected by the creditors’ committee, could come back with either a higher cash deal or better terms, or both.
Even after all the bids are in, Barneys could still try to persuade the creditors’ committee that a bid with a lower cash offer but better terms is beneficial for the company, i.e., one that has a provision for the Pressmans to retain some sort of management role.
Retail analysts in Hong Kong said Tuesday morning that if the $290 million is the correct valuation of Barneys’ operations, Poon probably wouldn’t go higher.
Alan Wong, an analyst at WI Carr in Hong Kong, said Poon was bargain-hunting when he made the $240 million bid.
“Poon doesn’t pay for good will, and tends to look for companies that he can buy at fair market value or below,” Wong said.
Wong also speculated that Poon could come in with an offer close to the $290 million offer that includes better terms than the one he already put on the table.
Elizabeth Gouw, an analyst at UBS Ltd. in Hong Kong, said that for Poon to go as high as $300 million “is a bit much for Barneys,” particularly since that amount is substantially higher than the initial $240 million bid.
“Even though Barneys is a perfect fit for Dickson Concepts and has long-term potential, Dickson is a small company,” noted Gouw. “The question is whether Poon is willing to pay that much more when turning around Barneys would be such a high risk for him.”
One source warned that Poon shouldn’t be written off just yet. There is still the matter of Barneys’ request for up to $10 million in expenses and breakup fees. Should Poon come up with a higher bid that is accepted by Barneys, he could walk away with a $10 million windfall just for starting the bidding process if Barneys gets bought by another entity. A hearing on Barneys’ request for the payout is set for Thursday.
In Tokyo, Hirokazu Ishii, a retail analyst at Nomura Securities Research Center, told WWD earlier this month that the Saks-Isetan combination would be a good match for Isetan.
“The image of Saks is that of a well-run, sophisticated department store,” he said.
Ishii explained that Saks is a well-known brand name in the Japanese retail sector, whereas Dickson Concepts is not.
He also speculated that a Dickson Concepts-Isetan combination is not likely because the management team of each operation has different approaches.
While a Saks deal would rescue Barneys from bankruptcy and keep it in business, that wouldn’t be entirely good news for designers and vendors who sell to Barneys. With Saks taking over Barneys, these vendors, in effect, would be selling to just one Saks buying organization with more buying clout overseeing the two chains, rather than discrete Saks and Barneys buying organizations.
“It would hurt the market a lot,” said one source. “One less deal to negotiate kills the competitive edge. In the end, it’s the consumer who gets hurt.”
Saks is still fairly highly leveraged, with debt making up about 58 percent of capital against equity of 42 percent.
As of Aug. 3, 1996, according to a balance sheet filed in connection with the secondary offering of eight million shares last September, Saks had cash of just $2.7 million and long-term debt of $531.8 million.
A Saks offer structured with stock would probably dilute the equity in Saks at first. However, if the Barneys acquisition is profitable, the equity value could quickly be restored.
Separately, Saks Holdings said sluggish sales would cause first-quarter earnings to come in substantially below Wall Street estimates.
The parent of Saks Fifth Avenue said it expects earnings of about 20 cents a share in the period ended May 3, far short of analysts’ mean estimate of 33 cents a share. Wall Street estimates ranged from 30 to 40 cents a share.
In the year-ago quarter, Saks earned 9 cents a share.
Based on trends in March and April, sales rose 11.8 percent to $520 million from $465 million. Analysts had been expecting sales of between $550 to $560 million.
The retailer said results for the first quarter have primarily been hurt by continued softness in the Folio catalog operation, a slowdown in sales of the Off 5th off-price chain due to lower-than-planned sell-off inventory levels and lower-than-expected sales in casual bridge apparel at the full-line stores.
“The strategic initiatives that have contributed to our past two years of double-digit comparable sales and earnings growth remain fundamentally in evidence in the first quarter,” said Philip B. Miller, chairman and chief executive officer.
“While our first-quarter performance does reflect a significant increase over last year’s earnings results, we have taken steps to address the issues that arose during the period. In addition, we continue to implement our real estate strategies, which will enhance our penetration of key markets. As such, we are on track with the planning and construction of our core store projects and Off 5th stores for fiscal 1997.”
The forecast came out after the market closed. Saks rose 1 to 29 3/8 Tuesday on the New York Stock Exchange.
Results are expected to be reported on or about May 15. Saks operates 40 full-line stores, 34 off-price stores and the Folio direct mail business.