Dealwatch: Department stores

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Published March 5, 2008 at 1:56 PM

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Two thousand seven brought a modest amount of dealmaking for department stores and saw interest in particular from the international crowd. What's in store for 2008?

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Barington Capital Group LP has again put the pressure on family-owned department store group Dillard's Inc., demanding in a letter dated Feb. 29 to see a list of the company's shareholders as it steps up its campaign and wants to get other investors on its side. The news comes a month after Barington and fellow hedge funds Clinton Group Inc. and RJG Capital Partners LP, which collectively hold nearly 5.32%, suggested measures to boost Dillard's value, particularly that of its real estate assets. The investors also took issue with the company's stock price, which they say has dipped nearly 52% since June 30, and while its competitors didn't post blockbuster performances, the S&P Retail Index fell just 23% in the same period.

The January news came seven months after the hedge fund's chairman and CEO James Mitarotonda sent a letter to the company's chairman and CEO William T. Dillard II about a meeting to talk about boosting profitability. The Deal's Dave Shabelman pointed out at the time the New York hedge fund has taken activist positions in other retail companies, including Stride Rite Corp., Steven Madden Ltd., Payless ShoeSource Inc. and Pep Boys-Manny, Moe & Jack.
In August, Mitarotonda sent a letter to the company's board, according to a Jan. 29 filing.
Shabelman noted in September that persistent disappointing sales could amp up the campaign.

Meanwhile, NRDC Equity Partners LLC -- the private equity firm that owns Lord & Taylor LLC -- agreed to bail out ailing jewelry and home goods retailer Fortunoff Fine Jewelry and Silverware LLC with a $100 million deal, the target said in February, alongside news it would file for bankruptcy protection. The news came days after a New York Times report said the two were in talks. L&T wants to open a Fortunoff boutique in its flagship Fifth Avenue location and sell its jewelry in its other stores nationwide, the report said, citing unnamed sources.

In other department store news, Dealscape and Corporate Dealmaker recently took a look at Sears Holdings Corp. and what may now be in store for the company. Meanwhile, Carl Icahn has set his sites on J.C. Penney Co. with a sizable stake in the department store group, according to The Wall Street Journal. The investor, the Journal said citing an unnamed source, has been critical of the company's expansion, especially outside of shopping malls. See more on J.C. Penney's efforts below.

And kicking off January, The Deal's Christine Idzelis pointed out that leveraged retailers could be hard hit given the current economic climate, but that for niche department stores like high-end seller Neiman Marcus Group Inc., which TPG and Warburg Pincus LLC took private in 2005, it may be easier to weather the storm.

INTERNATIONAL SHOPPERS

In 2007, international investors went after a few high-end brand name department stores, a trend that could continue in 2008. High-profile Icelandic investor Baugur Group hf said in an Oct. 29 SEC filing said it could make a joint bid for Saks Inc. alongside Dubai's Landmark Group, to boost its U.S. presence, as The Deal's Renee Cordes noted.

In August, two months after Dubai, United Arab Emirates-controlled private equity house Istithmar PJSC agreed to buy luxury chain Barneys New York, it finally won its prize after a last-minute bidder dropped out of the race.

Istithmar said in late June it would pay $825 million for Barneys and as the deal was nearing its close, Japan's Fast Retailing Co. swooped in with a $900 million bid for the Jones Apparel Group Inc. subsidiary on July 31. Istithmar then matched the figure Aug. 5, and Fast Retailing bumped its proposal to $950 million. Istithmar then raised its own offer to $924.3 million Aug. 8, a figure it deemed superior, because a sale to Fast Retailing would have entitled Istithmar to a $34.7 million breakup fee. The Japanese group had until 5 p.m. Aug. 9 to counter the offer and instead withdrew.

While a source told The Deal's Lisa Gewirtz-Ward at the time Istithmar wasn't likely to raise its bid after the initial emergence of Fast Retailing, the sale came, she wrote, as:

Bristol, Pa.-based Jones Apparel has been struggling as its client base shrinks in the wake of traditional department store consolidation. President and chief executive Peter Boneparth unsuccessfully tried to sell the entire company to a private equity firm last year.

Barneys, on the other hand, has been the company's top-performing asset, giving Jones Apparel an entry into the faster-growing luxury market. Barneys operates about 35 stores, including full-size flagship shops in New York, Beverly Hills, Calif., Boston and Chicago, along with smaller Barneys New York Co-Op locations and outlet stores.

Meanwhile, nearly a month after a report indicated Macy's Inc. was the latest megabuyout target, and two months after the department store group underwent a corporate name change, Women's Wear Daily said July 18 that interested parties Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc. were trying to wrap up a deal ahead of a July 23 deadline. That date reportedly kicked off a series of investor meetings among the target's management. But as Gewirtz-Ward noted, the rumors seemed a little optimistic:

Several sources denied key portions of the report, and others question the feasibility of a leveraged buyout.

Neither Goldman Sachs' private equity arm nor its real estate unit are investing with KKR, as reported by Women's Wear Daily, a source with knowledge of the situation said. A second source said that other private equity firms mentioned in the article as potential suitors, such as Blackstone, have not taken a serious look at the retailer.

Although KKR's true intentions remain unclear, many sources questioned whether Macy's would make a good takeover target. A key problem is turning around the May's Department Store Co. franchise, which has been struggling since Federated Department Stores Inc. bought the retailer for $11.7 billion in August 2005.

Women's Wear Daily reported July 18 that KKR and Goldman Sachs were working on an offer for the department store chain valued at $52 a share, or about $24 billion, nearly one month after Bloomberg reported the prospective bid, which gave the company's shares their largest surge in more than a year. After opening below $39 per share June 22, Macy's shares rose above $43 apiece before retreating to close at $41.43 each. They spiked above $43 each again July 6 as deal buzz again gave them a boost and rose to a high of $45.50 Wednesday morning, July 18. They opened just shy of $42 apiece the next day.

The buyout talk first surfaced as Macy's missed targets and felt the impact of a weak home goods market. The company has also struggled to rebrand the stores it picked up in its deal for May's. Will the retailer be able to ride what The New York Times in November called a "comeback" -- the resurgence of the U.S. department store -- or is a turnaround out of the question? The question came as other department store chains were trying to position themselves for greater competition.

The initial Macy's speculation came the same day Jones announced its deal with Istithmar. No stranger to retail, the firm acquired discount retailer Loehmann's Holding Inc. in 2006 for $300 million from Atlanta private equity firm Arcapita Inc., an investmet unit of Bahrain-based Arcapita Bank BSC.
The news followed a New York Post report June 21 that Nordstrom Inc. was nearing a deal to sell its Faconnable brand as it expands its own Nordstrom stores, and that bids came in near $200 million. Days later, the New York Post said Nordstrom may have found a buyer -- an unspecified Lebanese private equity firm. On July 26, Nordstrom announced plans to sell the brand to Lebanon's M1 Group for $210 million.
Back in August 2006, Saks Inc. sold its high-end Parisian chain to Belk Inc. for $285 million. The deal was the Birmingham, Ala.-based company's final divestiture in a string of five, part of a broader restructuring the company announced in 2005.
Charlotte, N.C.-based Belk then unveiled plans in October 2006 to flip five of the stores in a $22 million, cash deal with York, Pa.-based Bon-Ton Stores Inc. Other asset sales in the transformation included: unloading its down-market group of Proffitts and McRae's stores to Belk for $622 million, and its Northern Department Store Group to Bon-Ton Stores for $1.1 billion.
Even downscale department store chains such as J.C. Penney Co. and Kohl's Corp. began updating stores in an attempt to woo new customers. In October 2006, Kohl's hosted its biggest opening with 65 new stores in one weekend, and unveiled plans to redesign older stores in Boston, Las Vegas, Los Angeles and Minneapolis. While Penney opened 20 new stores in a month. Kohl's indeed was moving to make its new stores not only easier to navigate, but a comfortable destination that includes coffee shops and TV lounges.
- The impetus for new stores may have been spawned by the Federated-May deal. Although both department store chains were avoiding a head-to-head with Federated, Kohl's and Penney were trying to woo former May customers put off by the Macy's experience, which is more upscale than most May chains.

BREAKING UP

To focus on the higher end of the market and its Macy's and Bloomingdale's stores, then-Federated announced two separate deals Nov. 17, 2006. The company unloaded discount bridal chain David's Bridal and upscale boutiques Priscilla's of Boston to Los Angeles private equity firm Leonard Green & Partners LP, as well as its After Hours Formalwear unit for about $850 million, collectively.

The news came a few months after Federated sold its New York-based Lord & Taylor LLC department store chain, another inheritance from May, to NRDC for $1.2 billion.

Even with the 55-store L&T sale, the company operates upwards of 850 department stores in 45 states, as well as Washington, Guam and Puerto Rico and in mid-November said it expected fiscal 2006 sales of nearly $27 billion.

--Carolyn Murphy

Dealwatch executive summary
The Date	The Action
2.29.08	Barington amps up pressure on Dillard's.
2.2008	Report: Icahn stakes J.C. Penney.
2.04.08	NRDC picks up Fortunoff.
1.29.08	Barington steps up Dillard's campaign.
1.28.08	Who will Lampert find to succeed Lewis? What does the trouble mean for key brands?
1.2008	Leveraged retailers may face tough times, but high-end department stores like Neiman Marcus may weather the storm better than others.
10.29.08	Baugur may bid for Saks.
8.09.07	Fast Retailing drops out of Barneys race, clears the way for Istithmar.
8.08.07	Istithmar bumps its offer.
8.05.07	Istithmar matches Fast Retailing offer, so Fast Retailing bumps it.
7.31.07	Jones hears new bid for Barneys.
7.26.07	Nordstrom sells off Faconnable.
7.19.07	Is a Macy's buyout really on the horizon?
7.18.07	Women's Wear Daily: KKR, Goldman want to ink Macy's deal this week.
6.28.07	Barington pressures Dillard's.
6.22.07	Dubai's Istithmar picks up Barneys.
6.22.07	Buyout rumors swarm around Macy's.
6.21.07	Nordstrom reportedly nears Faconnable sale.
11.17.06	Federated sells its bridal division for about $850 million.
11.17.06	Department stores are coming back, says The New York Times.
8.07.06	Saks sells Parisian stores.
6.23.06	Real estate veterans agree to acquire Lord & Taylor, five months after Federated said it was on the block.
6.09.06	True Religion hits the block.
10.31.05	Saks sells Northern Department Store Group for $1.1 billion.
8.30.06	Federated-May deal wins approval.
Source: The Deal