Nordstrom buyout? J. Crew lessons loom large
NEW YORK Nordstrom Inc. shareholders are applauding a plan by its founding family to consider taking the department-store chain private.
But there are few recent examples of retail buyouts that went smoothly, raising questions about how the family could raise sufficient funds to execute a deal — and whether it should even try.
Retailers like J. Crew Group Inc. and Neiman Marcus Group Inc. went private in leveraged buyouts, hoping to re-emerge with an initial public offering. The IPOs were both scrapped after mall traffic dwindled and sales dropped off. Other former LBOs are in even worse shape: Claire’s Stores Inc., Gymboree Corp. and True Religion Apparel Inc. have all been foundering.
Gymboree is expected to file for bankruptcy soon, people with knowledge of the matter have said.
Other, healthier chains such as Best Buy Co. have attempted to do buyouts in recent years and failed, said Michael Binetti, a UBS analyst.
“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 said in a report.
And the debt load required would make the Nordstrom deal “quite risky,” Binetti said.
The concerns showed up in credit markets on Thursday. Credit-default swaps, which represent the cost to protect against a Nordstrom default, hit their highest level in eight years.
Nordstrom’s bonds traded in both directions, whipsawed by speculation over whether the company has a deal structure in place that would allow the family to expand its ownership without triggering a so-called change-of-control event. In that case, Nordstrom would have to buy back the debt at 101 cents on the dollar if the notes fall to junk, said Bloomberg Intelligence analyst Noel Hebert.
The bonds shifted toward that value on Thursday. The short-dated unsecured notes due in 2021 fell 1.5 cents to 102.8 cents on the dollar, while its 2044 bonds rose 0.8 cents to 98.7 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The prospect of a buyout deal sent the shares up as much as 18 per cent on Thursday, paring their loss in 2017 to 6.9 per cent at the close. The shares extended gains on Friday, rising 5.67 per cent to close at US$47.16 in New York.
The company may need to raise about US$5.5 billion in additional debt to fund the takeout, according to Gordon Haskett analyst Chuck Grom. That would imply a lower earnings multiple than the average retail leveraged buyout. That need for more capital could lead private equity firms and retailers such as Hudson’s Bay Co. to get involved with Nordstrom, he said.