Family and private-equity partner explore new structure after struggling to raise debt
The Nordstrom family is scrambling to salvage its plan to take the high-end retailer private after running into trouble raising financing for a leveraged buyout that could be worth USD 10 billion, people familiar with the situation said.
The founding family, whose members still run Nordstrom Inc., and private-equity firm Leonard Green & Partners are considering a new structure for the buyout that would include less debt, the people said.
The family is trying to come up with more equity but it is unclear where it might come from, the people said. Another problem: adding equity would dilute the family’s ownership stake.
The partners could also try to find buyers for the unsecured portion of the debt at lower interest rates than the double-digit rates that banks have said they could offer, the people added. The family could also seek to tap the value of the chain’s real estate; the company owns 98 of its 123 department stores.
Under the original terms, the Nordstrom family was to contribute its 31 % stake in the company, which was valued at USD 2.5 billion as recently as Aug. 1. Leonard Green was to contribute USD 1 billion in equity, leaving the banks to sell about USD 6.5 billion in debt.
The banks are concerned they won’t be able to sell the debt before the holiday shopping season, an important bellwether for retailers, and would have to hold it until next year, exposing them to the risk that Nordstrom’s business, or the broader market, deteriorates, the people said. If a deal is going to be struck this year, it likely has to happen in the next two weeks, one of the people said.
Nordstrom shares, which initially traded up in June after the family said it was considering taking the business private, have fallen sharply this week after the New York Post reported the family was struggling to line up the necessary financing. The shares closed up 55 cents to USD 44.80 on October 5, 2017. The family’s stake is now worth USD 2.3 billion.
Investors have shown little faith in department stores, as fewer shoppers visit malls and online rivals squeeze the profit margins of traditional retailers. Macy’s Inc., J.C. Penney Co. and Sears Holdings Corp. are closing hundreds of locations.
Nordstrom, with a smaller footprint and stores mainly located in high-end malls, has escaped the worst of the shakeout. But it is not immune to the changes reshaping the industry. Net income for its most recent fiscal year fell by nearly half to USD 354 million on asset-impairment charges and higher technology and fulfilment costs. Sales rose nearly 3 % to USD 14.5 billion.
The department store chain is struggling to raise debt at a time when Wall Street is churning out loans to heavily indebted companies at a record pace. Its challenge in funding the deal is a bad sign for retailers, suggesting it has become increasingly difficult for them to access the debt market.
Retailers PetSmart Inc. and Staples Inc. issued billions of dollars of debt to fund transactions earlier in the year. But their bonds have lost value since, making it harder for others to follow suit. The decline has been especially steep for PetSmart’s unsecured bonds due in 2025, which were sold at par in May with an 8.875 % coupon and traded October 6, 2017 at 81.2 cents on the dollar to yield around 12.8 %, according to MarketAxess.
“The banks are saying the risk of lending to retailers is higher, because the landscape is changing so quickly and there are increased unknowns in a world dominated by Amazon,” said William Susman, a managing director with Threadstone Advisors, an investment firm specializing in the consumer and retail sectors.
Toys ‘R’ Us Inc. filed for chapter 11 bankruptcy protection last month, felled by USD 5 billion in debt from a 2005 leveraged buyout, underscoring the risks of piling on debt at companies that are struggling to grow.
The cost of servicing the debt from a buyout could further squeeze Nordstrom’s bottom line, said Barbara Miller, a stock portfolio manager at Federated Investors Inc. who doesn’t own Nordstrom shares. “If you layer debt onto a company when growth is already constrained it can further impair the company’s ability to effectively compete,” she said.
Nordstrom declined to comment.