Saks Owner Hudson’s Bay in talks to buy Neiman Marcus

Saks Owner Hudson’s Bay in talks to buy Neiman Marcus

Neiman Marcus Group Ltd. is in talks to sell itself to the parent of Saks Fifth Avenue, according to people familiar with the matter, as the two upscale chains struggle with a shift away from traditional stores, even among the wealthiest shoppers

The luxury department-store operator, which has been controlled by private-equity firms for a dozen years, has been grappling with a USD 5 billion debt load as sales have declined in recent years. Hudson’s Bay Co., which owns Saks along with Lord & Taylor, has been looking to take over another U.S. rival to gain scale and cut costs.

On March 14, Neiman Marcus said it hired financial advisers to explore strategic alternatives, including a potential sale or debt restructuring. It didn’t say whether it was in talks with any potential buyers, but the people familiar with the matter said Neiman Marcus’s owners had reached out to Hudson’s Bay in recent weeks.

Hudson’s Bay is seeking a complex and unusual deal that would give it control of Neiman Marcus without assuming the company’s debt, the people said. The discussions are moving quickly, though it is far from certain that a deal will be reached.

After starting in 1907 with a single store in Dallas that catered to Texas oil wealth, Neiman Marcus grew into a luxury powerhouse with a few dozen U.S. locations that focused on the very rich. That strategy insulated it from swings in the economy, allowing the company to outperform peers in good times and bad—until recently.

The company lost USD 406 million on sales of nearly USD 5 billion in the fiscal year ended in July. It recently abandoned plans to go public, and credit-rating firms have warned there is a high risk it will default on its obligations.

Table 1 Hudson Bay

Combining with Hudson’s Bay would likely yield significant savings that could help turn Neiman Marcus around, people close to the companies said. A deal could be structured in a way that would put it under a new holding company without technically changing control of Neiman Marcus, the people said.

That is important because a change of control could trigger an obligation to buy back Neiman Marcus’s deeply discounted bonds at face value, which would be prohibitively expensive for Hudson’s Bay. The big question is whether Neiman bondholders would go along and hope for a turnaround that would boost the value of their securities—or mount a legal challenge to any such deal.

Neiman Marcus said on March 14, 2017 that it transferred certain assets to unrestricted subsidiaries, effectively placing them out of reach of bondholders. The assets included MyTheresa, a German luxury retailer it bought in 2014 and real estate in Texas and Virginia.

How do you separate a department store chain from its debt? Hudson’s Bay is trying to find out.

The owner of Saks Fifth Avenue and Lord and Taylor is in talks to buy Neiman Marcus Group, The Wall Street Journal reported Tuesday. Hudson’s Bay wants to buy Neiman’s assets, but not the retailer’s USD 5 billion in debt. Hudson’s Bay’s own debt already stands at a hefty 5.6 times estimates for its fiscal 2017 earnings before interest, taxes, depreciation and amortization. The company declined to comment on the deal but said it looks for opportunities to grow “while maintaining or enhancing its credit profile.”

The unconventional arrangement may seem like a relatively low-risk proposition for Hudson’s Bay, but Neiman’s bondholders aren’t likely to love it. The company, which was purchased by its current private-equity owners for USD 6 billion, including debt, in 2013.

Last fall, Neiman’s lenders allowed it to extend the maturity on its credit line from 2018 to 2021, buying it some time. The company scrapped its plans to go public in January.

For bondholders, the deal may be the best payoff they can hope for. Neiman’s bonds have fallen more than 11 % this year and yield more than 10 %, according to FactSet.

Sales at Neiman have been in steep decline, falling 6.7 % to USD 2.47 billion in the 26 weeks ended Jan. 28. The company reported a net loss of USD 140.6 million for the period.

Neiman debt holders now face a choice between continuing the long march toward bankruptcy and an unpalatable deal that at least gives them something. Investors in other debt-laden retailers should beware.

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