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Nordstrom’s Transformation Hangs on a Private Equity Deal—Or Does It?

As the Nordstrom family pursues its goal of finding a private equity partner to help it take the company private, the industry debates the risks and rewards of such a plan.

In June, the Nordstrom family—which is comprised of co-presidents Blake W. Nordstrom, Peter E. Nordstrom, and Erik B. Nordstrom, president of stores James F. Nordstrom, chairman emeritus Bruce A. Nordstrom, and Anne E. Gittinger—announced its intentions of taking the company private to better address the current and future retail environment.

Initially, Wall Street showed gains, but then it lost confidence once sources close to the proceedings indicated the company has failed to capture enough interest to enter into the negotiation phase with a suitor.

Meanwhile, the industry is divided over whether the plan has merit.

While there seems to be a consensus that it’s easier to undertake a transformation as a private company, questions remain about whether the benefits of going private will be enough to override the potential pitfalls associated with getting in bed with private equity.

Concerns are heightened given the recent track record of private equity buyouts in the retail segment.

The cautionary tales include Rue 21, which filed for bankruptcy in May with more than $1 billion in debt that can be traced back to the leveraged buyout by private equity firm Apax Partners in 2013. Similarly, Gymboree finally succumbed in June after laboring under $1 billion in debt from a buyout from Bain Capital in 2010.

That’s not to say all private equity arrangements end in bankruptcy court, however. And in the case of Nordstrom, the family would remain involved and it presumably would maintain a longer view for the business, which could make the difference between a happy and tragic ending.

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Steven Dennis, president and founder of SageBerry Consulting and former Neiman Marcus executive says, the Nordstrom plan has little downside—so long as they’re careful. “Neiman’s has struggled of late, but their main issue is the private equity firms paid too much for the company and laid on far too much debt,” he said.

For Nordstrom, what they need, he said, is a fair price, moderate leverage and private equity partners that will be on board with what it will take to transform a fashion retail business.

If it can strike an ideal deal like this, the rewards would outweigh the risk, according to Dennis.

“Wall Street is overly focused on short-term performance for traditional retailers, so [as a private company] Nordstrom has the ability to ‘do the right thing’ even if it hurts near-term quarterly performance,” he said. It would also allow the retailer to grow at a reasonable rate rather than the “arbitrary and unattainable growth” the market demands.

While Howard Davidowitz, chairman of national retail consulting and investment banking firm Davidowitz & Associates, agrees there are potential benefits, he isn’t convinced this is the right route. “Debt is not your friend when you’re in the most volatile of markets and you’re facing massive change. Piling on debt to me looks crazy,” he said. “I would pile on equity to fight the battles.”

Davidowitz said the Nordstroms already have a smarter, safer option at their disposal. “I don’t understand why they can’t spin off Nordstrom Rack, which is in the best segment of retail, off-price, and Nordstrom Rack is clearly outperforming the company,” he said.

[Read more about the off-price channel: Follow the Leader: Off-Price Gets Crowded]

In Davidowitz’s scenario, Nordstrom Rack, which experienced a 8.7% increase in net sales in the last quarter, would go public, which would generate cash flow for Nordstrom. While Nordstrom would still have to evolve the mainline business as a public company, he said it “seems to be a much wiser way to recapitalize the company than adding on billions in debt.”

Ultimately, the decision of whether to go the private equity route could be made for the retail chain as the days go by without a deal, which analysts say must come before November. Late last month, Reuters reported that the family was sweetening the deal, offering potential partners preferential terms—a development that suggests the group is finding it difficult to close a deal.

The worst case scenario if a partner doesn’t emerge is that the company will need to forge ahead with its evolution as a public company—something Davidowitz said isn’t a bad idea. “[Nordstrom could] do nothing, take a long-term view, say screw Wall Street, and run [the] business, and in 4 to 5 years from now everything will be fine, which I think it will.”