A Nordstrom Buyout? Lessons of J. Crew and Neiman Loom Large
Bloomberg
Jun 09, 2017
Nordstrom Inc. shareholders are applauding a plan by its founding family to consider taking the department-store chain private.
But there are few recent examples of retail buyouts that went smoothly, raising questions about how the family could raise sufficient funds to execute a deal -- and whether it should even try.
Retailers like J. Crew Group Inc. and Neiman Marcus Group Inc. went private in leveraged buyouts, hoping to re-emerge with an initial public offering. The IPOs were both scrapped after mall traffic dwindled and sales dropped off. Other former LBOs are in even worse shape: Claire’s Stores Inc., Gymboree Corp. and True Religion Apparel Inc. have all been foundering.
Gymboree is expected to file for bankruptcy soon, people with knowledge of the matter have said. Other, healthier chains such as Best Buy Co. have attempted to do buyouts in recent years and failed, said Michael Binetti, a UBS analyst.
“We’re cautious about a department store’s ability to secure a bid of this magnitude, given the structural headwinds facing the sector today,” he said said in a report. And the debt load required would make the Nordstrom deal “quite risky,” Binetti said.
The concerns showed up in credit markets on Thursday. Credit-default swaps, which represent the cost to protect against a Nordstrom default, hit their highest level in eight years.
Ownership Clause
Nordstrom’s bonds traded in both directions, whipsawed by speculation over whether the company has a deal structure in place that would allow the family to expand its ownership without triggering a so-called change-of-control event. In that case, Nordstrom would have to buy back the debt at 101 cents on the dollar if the notes fall to junk, said Bloomberg Intelligence analyst Noel Hebert.
The bonds shifted toward that value on Thursday. The short-dated unsecured notes due in 2021 fell 1.5 cents to 102.8 cents on the dollar, while its 2044 bonds rose 0.8 cents to 98.7 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The company may need to raise about $5.5 billion in additional debt to fund the takeout, according to Gordon Haskett analyst Chuck Grom. That would imply a lower earnings multiple than the average retail leveraged buyout. That need for more capital could lead private equity firms and retailers such as Hudson’s Bay Co. to get involved with Nordstrom, he said.
Nordstrom’s peers offer painful lessons in what can go wrong with a leveraged buyout. Neiman Marcus Group has $4.9 billion in debt and is on its second round of owners since it was taken private in 2005. The luxury department-store chain abandoned plans for an IPO in January and is now looking to sell itself again -- potentially to a strategic buyer such as Hudson’s Bay.
But Hudson’s Bay, the owner of Saks Fifth Avenue, is struggling itself through a painful transition. The company announced plans on Thursday to cut 2,000 jobs in North America.
CEO Change
J. Crew hasn’t fared well either. Laden with about $2.1 billion in debt after its buyout by TPG and Leonard Green & Partners LP in 2011, the preppy chain just announced plans to replace longtime CEO Mickey Drexler. At the same time, it’s holding contentious negotiations with lenders about the company’s future.
Like other retailers, Nordstrom has seen sales stall in recent quarters. But it’s in better shape than many chains.
With little debt on its balance sheet, the Seattle-based company could be more attractive to private equity firms. The risk of loading up on loans would be offset by the opportunity to increase gross margins and enter into new markets, said Bridget Weishaar, an analyst at Morningstar. As a private company, Nordstrom could further expand its discount Rack chain, open full-line stores in new cities and even grow internationally, she said.
With the founding family actively involved, a private Nordstrom could avoid some of the pitfalls that other retail buyouts have fallen prey to -- from overly aggressive expansion to counterproductive cost cutting, Weishaar said.
“It’s the family -- it’s not just private equity,” she said. “I do think that makes a difference.”
Family’s Stake
Together, the Nordstrom family owns about 30 percent of the company’s shares, and Gordon Haskett’s Grom estimates they would need to raise between $5.65 billion and $8.19 billion to acquire the remainder of the retailer. Recent retail buyout multiples would imply a $70 share price for Nordstrom, Grom said, compared with the roughly $45 it trades at today.
“Their sector is challenged, they need to do a lot to change, but they’re not a Sears,” said Kathy Gersch, executive vice president at change management firm Kotter International and a former vice president at Nordstrom. “It’s probably a good thing for them.”
Nordstrom, which was founded in 1901, operates 354 locations in 40 states. But most of them are Rack outlets, the off-price format that has been more popular with shoppers in recent years. The retailer has 122 full-line department stores.
The company warned on Thursday that a buyout deal may not materialize. But the fact that Nordstrom made a formal announcement suggests that financial backers may already be interested in a deal, said Gabriella Santaniello, founder of retail research firm A-Line Partners. If a buyout is successful, it could set the stage for more consolidation and privatization as retailers look for some respite from the cut.
“The climate clearly isn’t favorable at this point,” Santaniello said. “I do think there’s a lot more of that to come -- going private, mergers and acquisitions. People have to find a way to make things better for themselves.”