Saks Owner Hudson's Bay in Talks to Buy Neiman Marcus

Retail The Wall Street Journal

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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.

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The luxury department-store operator, which has been controlled by private-equity firms for a dozen years, has been grappling with a $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 Tuesday, 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 $406 million on sales of nearly $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.

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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 Tuesday 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.

Research firm Gimme Credit said Tuesday that it would be possible for Hudson's Bay to buy Neiman Marcus without repaying debtholders. Credit agreements often allow "creative and successful efforts to structure sale transactions to prevent a 'required' redemption of bonds," the research firm wrote.

Neiman Marcus debt traded higher after The Wall Street Journal first reported on the talks early Tuesday. One of the retailer's bonds bearing 8% interest and due in 2021 rose to about 60 cents on the dollar in recent trading, up from 56 cents on Monday, according to MarketAxess.

Ares Management LP and the Canada Pension Plan Investment Board bought Neiman Marcus in 2013 from another group of private-equity backers for $6 billion including debt. But their equity investments have been largely wiped out, the people said. Should they agree to a deal with Hudson's Bay, the firms would likely end up with a stake in the combined company.

Neiman Marcus operates 42 namesake stores in the U.S., as well as two Bergdorf Goodman stores on Fifth Avenue in New York City and 42 Last Call discount stores. By contrast, Hudson's Bay has roughly 480 stores globally, including 41 Saks locations.

Despite its focus on wealthy shoppers, Neiman Marcus hasn't been immune to the factors reshaping retailing. Consumers increasingly mix high and low fashion, pairing a Chanel jacket with Nike sneakers, for instance. And smartphones have made it easier to check prices, requiring even high-end retailers to provide discounts to lure shoppers.

Meanwhile, fashion brands are selling more goods directly to consumers through their own stores and the internet, sometimes bypassing department stores that were once their lifeblood.

"There's no question that our core customer is visiting us a little less frequently," Neiman Marcus CEO Karen Katz told analysts in December.

Neiman Marcus would be the latest in a string of deals for Hudson's Bay Chairman Richard Baker. He first bought Lord & Taylor and then scooped up Canada's Hudson's Bay, which he used to acquire Saks and Galeria Kaufhof, a German department store chain. Earlier this year, he approached much larger rival Macy's Inc. about a potential takeover, the Journal reported-but Hudson's Bay considered Neiman Marcus a better opportunity, one of the people familiar with the situation said. Neiman Marcus has more synergies with Saks and is less troubled than Macy's, which has a far larger store base.

 

While Saks has also struggled, it has shown improvement recently. Sales at existing Saks stores increased 0.1% in the latest quarter, which ended Jan. 28. The figures don't include the Saks Off Fifth discount stores.

Neiman Marcus leases the majority of its stores, including its Bergdorf Goodman locations, but many of the leases are likely at below market rents, industry executives and analysts said. For instance, the lease for its main Bergdorf Goodman store was signed in 1901 and doesn't expire until 2050.

For the six months ended Jan. 28, Neiman Marcus reported a loss of $140.6 million as revenue fell 6.7% to $2.65 billion. Sales at existing stores in the most recent quarter fell 6.8%, extending a string of declines dating back to the middle of 2015.

"In a tougher luxury environment, you need more scale to do things like data analysis, marketing and e-commerce," said former Saks CEO Steve Sadove, who resigned soon after the company was sold to Hudson's Bay in 2013. "There are substantial synergies between these companies and it makes a lot of sense for them to combine."

Standard & Poor's recently downgraded its credit rating on Neiman Marcus to triple-C-plus, well into junk territory, saying there was a substantial risk of default. "The company's capital structure is unsustainable over the long term," S&P said.

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