(Adds context, Hudson's Bay talks)
By Lauren Hirsch and Jessica DiNapoli
March 14 Luxury fashion retailer Neiman Marcus
Group said on Tuesday that it was exploring options, including
changes to its capital structure or a sale, as it seeks relief
from a swelling debt load amid renewed buyout interest from
Hudson's Bay Co.
The announcement follows a Reuters report earlier this month
that the company had turned to investment bank Lazard Ltd
to explore ways to bolster its balance sheet. Neiman
Marcus has total liabilities of $6.4 billion, including $1.2
billion of deferred income taxes.
Hudson's Bay, owner of the Lord & Taylor and Saks Fifth
Avenue retail chains, is in exploratory talks to acquire Neiman
Marcus, people familiar with the matter said. It last considered
acquiring Neiman Marcus in 2013, sources said at the time.
Hudson's Bay's interest comes as the retail sector faces
headwinds that have dented the company's own sales and made it
difficult to line up equity financing for a bid for department
store operator Macy's Inc, sources had told Reuters.
With Neiman Marcus' bonds trading at about half their par
value, a sale of the company would likely require creditors
accepting a steep haircut on their holdings, making an
acquisition challenging to structure and pull off, especially
for Hudson's Bay, which has market capitalization of C$2.1
billion ($1.6 billion) and net debt of $4.5 billion.
Hudson's Bay and Neiman Marcus declined to comment.
Hudson's Bay, Neiman Marcus and Macy's are under pressure to
offer discounts to entice shoppers who increasingly prefer the
prices and convenience of internet retailers.
Dallas-based Neiman Marcus' woes have been exacerbated as
affluent Texans have cut back on shopping because of a drop in
energy prices, while a stronger U.S. dollar has restrained
spending at Bergdorf Goodman department store, a popular New
York tourist destination that is owned by Neiman.
The Wall Street Journal reported earlier on Tuesday that
Hudson's Bay was seeking a deal that would give it control of
Neiman without having to assume its debt. It did not provide
details as to how this can be achieved without at least
partially compensating creditors.
Neiman Marcus also said that it made changes to its
corporate structure, including naming subsidiary online store My
Theresa and some of its properties in Virginia and Texas
"unrestricted," meaning not subject to the same rules under
credit agreements as other units of the company.
However, experts said this was aimed more at helping the
company better manage its debt liabilities.
"They want to increase flexibility to deal with creditors,"
said Anthony Canale, head of high yield research at research
firm Covenant Review LLC. "They want a bargaining chip."
The company wrote down the value of the Neiman Marcus brand
by $153.8 million, after having reduced it by $466.2 million
last September. It also reported a net loss of $117 million for
the 13 weeks ended Jan. 28, compared with year-earlier net
earnings of $7.9 million, which it blamed in part on an
inventory management system that failed to work properly,
leaving it unable to fill orders.
REAL ESTATE USED AS FINANCING
Private equity firm Ares Management LP and the
Canada Pension Plan Investment Board own Neiman Marcus, after
acquiring it for $6 billion in 2013.
Neiman Marcus would be a significantly smaller acquisition
than Macy's. It had $4.9 billion in sales in 2016, compared with
Macy's $25.8 billion, and has roughly 40 stores, compared with
more than 700 stores operated by Macy's.
Still, the company owns some of its real estate, long core
to Hudson Bay's strategy of borrowing against its real estate to
finance acquisitions or taking out large mortgages, as it most
famously did on Saks' flagship fifth avenue location. Neiman's
real estate was valued at roughly $1.2 to $1.5 billion,
according to a recent Citi analyst note.
Hudson's Bay has used its real estate partnerships with
U.S.-based Simon Property Group Inc to finance the
acquisition of Galeria Holding, the parent company of German
department store Kaufhof, for approximately $3 billion. It also
has a joint venture with Canada's RioCan Real Estate Investment
"Looking at the Hudson's Bay playbook, what they have done
with the German department store and with Saks, real estate was
a key piece of the consideration," said Helena Song, an analyst
at credit ratings agency Standard & Poor's. "I wouldn't be
surprised if we see a similar consideration here, as well."
(Reporting by Lauren Hirsch and Jessica DiNapoli in New York;
Additional reporting by Sruthi Ramakrishan in Bengalaru; Editing
by Lisa Von Ahn and Bernard Orr)