Investors are biding their time and waiting for the next wing tip to drop.
Shares of Nordstrom Inc. rose modestly Tuesday after a special committee of the firm’s board nixed the Nordstrom family’s initial proposal for a buyout at $50 a share, valuing the department store at $8.4 billion.
Nordstrom’s stock increased 1.1 percent to end the day at $52.49.
The committee — which was expected to show its independence given its close ties with the would-be acquirers — declared the family needed to “substantially improve” its price or the committee would “terminate discussions.”
In its proposal letter to the special committee, the Nordstrom family said its offer represented a 24 percent premium over the company’s “undisturbed share price of $40.48 as of June 7” when the process began.
The prospects of a deal boosted the stock and has supported it over the past nine months, but as more time passes, that price starts to weaken as a point of comparison for many investors, who could argue Nordstrom’s stock would have risen anyway given the solid holiday season.
All of that makes it the Nordstroms’ next move, which in addition to a new price, might include an alternative deal structure or some fresh faces.
The family controls 31.3 percent of Nordstrom’s stock and in its letter said it plans to sell off nearly one-fifth of its holdings for $500 million in the proposed transaction, but would keep the rest of the equity in the company.
In its letter, the Nordstroms said they would contribute shares worth $2 billion to the deal, while private equity firm Leonard Green & Partners, its affiliates and its limited partners would commit $1.5 billion to $2 billion in financing.
The family also noted, “Our representatives are in active discussions with several alternate capital providers to potentially complement and provide additional flexibility to our contemplated capital structure.”
The Nordstroms already collected competitive proposals from 10 banks with various options that contemplate putting as much as $7.5 billion in debt onto the company’s books.
That would be a big jump in debt and one that would force the company to spend more on interest payments and also limit its flexibility as it seeks to reinvent away from the gaze of the public markets.
According to S&P Capital IQ, the retailer has total debt of $2.7 billion, with annual sales of about $15.5 billion, or about 17 cents of debt for each dollar of sales.
A deal with $7.5 billion in debt would boost that to about 48 cents of debt for each dollar of sales. That’s much higher, but still not the debt load weighing down other retailers that have gone through buyouts. J. Crew Group has about 71 cents of debt for every dollar of sales and Neiman Marcus Group carries $1.02 in debt for every dollar of sales.
Just how much is too much is an open question and, for now, it’s all academic anyway. The deal hinges more on how much debt the Nordstroms are comfortable with and how much the market will lend them.
That should become more clear over the next few weeks.
The Nordstrom family said it has hired an investment bank to get an advisory rating from the major credit rating agencies that would give the market a sense of how risky all that debt might be.