While other retailers are trying to dig out of the mess their private equity deals have left them, Nordstrom is in search of possible buyout partners.
On Thursday, Nordstrom announced that the family after which the retail chain is named, have banded together to form a group to explore the possibility of taking the business private. Just one day later, news leaked that they’re in talks with buyout firms.
The group 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, who together own more than 30 percent of the company’s shares.
Sources close to the developments say the group is looking for $1 billion to $2 billion in equity to fund a bid. The Nordstroms are expected to continue to vet potential equity partners over the next couple of weeks.
While the consensus among analysts seems to be that taking the company private would allow the retailer more flexibility for restructuring or making investments in the business, not all of them are keen on the idea of private equity.
The one thing they can agree on: the family steering the ship and putting up its own money makes the deal more favorable—and more likely to end well.
On the other hand, recent headlines could be a cautionary tale for the retailer. Leveraged buyouts haven’t been kind to the retail community with stores like Neiman Marcus, J. Crew and Gymboree floundering—the latter of which just filed for bankruptcy in the face of its mountain of debt.
Instead of providing the family with the freedom it needs to maneuver, the deal could ultimately sap liquidity, narrowing its options. This was the case for Rue 21, which struggled with $1 billion in debt after a leveraged buyout by Apax Partners in 2013 before filing for bankruptcy protection.
Read more on the pitfalls associated with becoming overleveraged: How a Lack of Liquidity is Tanking Retail—And Who’s to Blame
In a note obtained by The Spokesman-Review, Michael Binetti, a UBS analyst, said he thinks a deal like this could be “quite risky.” And, he added, the chances of it coming to pass don’t look good. “We’re cautious about a department store’s ability to secure a bid of this magnitude, given the structural headwinds facing the sector today,” he wrote.
Binetti said the Nordstroms might need to raise as much as $4.5 billion in outside capital plus $1.5 billion in private equity.
Neil Saunders, managing director at GlobalData, agrees that closing a deal like this could be challenge given that the current retail environment has taken the value out of assets like leases and warehouses.
“Even though Nordstrom is doing better than others, department stores are under pressure so the value of the assets they’ve got against their debt could decline,” Saunders told Reuters.
On the other hand, sources told the news outlet that it’s exactly this challenging market that might bring forth a partner if they see the value of the potentially undervalued segment.
Calling Nordstrom one of the best department stores around, Bridget Weishaar senior equity analyst for Morningstar, ticked off the ways in which it’s moving in the right direction, including chasing the off-price model, focusing on brands with tightly controlled distribution and sticking to its better but not luxury market position.
In a note on the company’s site, Weishaar said, “We believe the balance sheet could support additional leverage, with current net debt sitting at about 1 times adjusted EBITDA. We continue to believe the market is undervaluing the business.”