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Saks: LBO candidate or strategic target?

by Richard Collings | Published May 23, 2013 at 9:42 AM

Did Saks Inc. hang a sale sign out for itself because of a hot market for luxury retail leveraged buyouts or because it's in the crosshairs of a strategic acquirer?

Those were the possibilities Wall Street bankers and analysts kicked around after The New York Post broke the news Tuesday that the iconic New York department store has hired investment bank Goldman, Sachs & Co. to explore strategic alternatives.

The Daily Deal has since confirmed Saks has hired the investment bank.

But one retail sector investment banker said hiring Goldman was more likely a defensive response to an investor that recently and significantly increased its stake in the company.

Saks spokeswoman Julia Bentley said in an e-mailed statement, "It is against our policy to comment on rumors or speculation."

Southeastern Asset Management Inc., which has been invested in Saks for several years, has had the biggest run-up in its share ownership within the past month. In a regulatory filing on Dec. 10, the investment firm reported it had boosted its stake to 17.8%. Then, by April 26, the firm raised its share of the company to 19.3%.

Although Southeastern is known to sometimes take an activist stance -- witness its pairing up with Carl Icahn to oppose Michael Dell and Silver Lake's $24.4 billion LBO for Dell Inc. -- a source familiar with the Saks situation said it was unlikely that the firm was directly behind a sale process.

Southeastern declined to comment on its investment.

Other major shareholders who have accumulated stakes in Saks, according to regulatory filings, include Diego Della Valle, the chairman of Tod's SpA, with nearly a 15.1% stake, as well as Italian bank Mediobanca Banca Di Credito Finanziario SpA, with about a 5.3% stake. Mexican tycoon Carlos Slim, through his company Inmobiliaria Carso SA de CV, has a 15.4% stake.

But one thing that could be motivating Saks is the potential buyout of rival Neiman Marcus Group Inc., which recently hired Credit Suisse Group to explore a dual-track initial public offering and sale.

As Neiman shops itself, Saks too, could be looking to take advantage of the available pool of buyers being generated.

And Saks has been considered a leveraged buyout target ever since Neiman Marcus was taken private in 2005 by private equity firms TPG Capital and Warburg Pincus LLC in a $4.7 billion deal.

The financial crisis squashed takeover speculation, but with the buyouts of J.Crew Group Inc. and Gymboree Corp., both in 2010, practically every retailer was thought to be a possible target.

While reports have Kohlberg Kravis Roberts & Co. LP weighing buyouts and a merger of Neiman and Saks, an industry analyst said such a move was unlikely.

Neiman and Saks have overlapping stores at a number of locations, so acquiring Saks to merge with Neiman Marcus would essentially be the equivalent of buying a competitor to shut it down, this analyst said.

And the only businesses that would get any benefit from that would be competitors such as Nordstrom Inc., Macy's Inc., Bloomingdale's and Barneys New York Inc., the analyst added.

Also, Steven Dennis, president of SageBerry Consulting LLC and a former executive and current shareholder of Neiman Marcus, said Saks' real estate portfolio would weigh against a Neiman combination because of the limited use for many of the locations if they were closed.

On paper, Saks looks like a decent buyout candidate, with an enterprise value as a multiple of Ebitda of 9.5, and low debt, even at its current stock price of $15.52, up about 13.5% Wednesday after the news about a potential sale broke.

Ebitda as of May 4 was nearly $266 million, cash was $20 million and total debt was $317 million. Its market cap was $2.24 billion, with an enterprise value of nearly $2.54 billion.

But Dennis said that at 9.5 times Ebitda, Saks is now becoming expensive enough to give potential buyers pause, particularly because Saks is a fairly mature brand.

Saks is often viewed by analysts as the dowdy rival to sleeker, hipper and better-operated competitors such as Neiman Marcus, Nordstrom, Bloomingdale's and the ultra-cool Barney's.

All the chatter about a sale of Saks comes against a backdrop of a bull market and luxury goods space, leading some to wonder whether the sector is reaching its peak in terms of sales, growth and valuation.

Results this reporting season have "shown the negative relationship of inventories to sales growth for all companies other than Macy's," Credit Suisse analyst Michael Exstein said in a note Tuesday. "Saks putting itself up for sale may be another indication that we are getting closer to a cyclical peak for some retail stocks."

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Saks: LBO candidate or strategic target?

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Richard Collings

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