Neiman Marcus agrees to sale

Cotten Timberlake and Brett Cole

Monday, May 2, 2005 | 9:38 a.m.

Neiman Marcus Group Inc., the department-store chain that sells $4,800 Gucci purses, agreed to a $5.1 billion takeover by two buyout firms, the third multibillion-dollar retail deal this year.

Texas Pacific Group and Warburg Pincus LLC will pay $100 a share, a 1.7 percent premium over the retailer's closing price on April 29, Dallas-based Neiman Marcus said in a statement today. The retailer, which operates 37 stores including two Bergdorf Goodman locations in New York, may later sell its credit card business.

The acquisition involving Texas Pacific, which has a stake in J.Crew Group Inc., is the latest example of buyout firms purchasing retailers. Shares of Neiman fell as much as 6 percent on concern about financing the deal because of its high price and softness in the junk bond market.

"These people go for maximum financing," said Howard Davidowitz, chairman of the retail consulting and investment-banking firm Davidowitz & Associates Inc. in New York. "If we are at a point in the economic cycle where the consumer is softening, and that is what is happening, that is making the deal even more dangerous."

Shares of Neiman Marcus, which had long-term debt of $437 million as of Jan. 29., fell $5.52 to $92.80 at 10:08 a.m. in New York Stock Exchange composite trading. The stock has jumped 23 percent since March 15, the day before Neiman announced it had hired Goldman Sachs Group Inc. as an adviser.

If there is a sale of the credit card unit, which had receivables of $526 million at the end of Neiman's fiscal year, there will be no distribution to current shareholders, spokeswoman Ginger Reeder said.

Texas Pacific Group, based in San Francisco, manages more than $15 billion. It was founded in 1993 by David Bonderman, Jim Coulter and Bill Price and has offices in London and Fort Worth, Texas.

New York-based Warburg Pincus has about $13 billion under management. Its investments range from toymaker Mattel Inc. and Indian mobile phone operator Bharti Tele-Ventures Ltd. to radio stations in Moscow and St. Petersburg.

Chief Executive Burton Tansky will stay with the company. "We are delighted to be partnering with Burt Tansky and the rest of the Neiman Marcus management team," Jonathan Coslet, a Texas Pacific partner, said in a statement. "We hope to build on their exceptional track record."

Two other buyout groups -- Blackstone Group LP and Thomas H. Lee Partners LP, and Kohlberg Kravis Roberts & Co. and Bain Capital LLC -- also bid for Neiman Marcus.

The family of Neiman Marcus Chairman Richard Smith, which held a 12.7 percent stake at the end of November, is selling as financial buyers compete for retailers. The family will get about $648 million for its stake.

In March, buyout firm Kohlberg Kravis Robert & Co., Bain Capital Partners and a real estate trust agreed to purchase Toys "R" Us Inc. for $6.6 billion. In February Highfields Capital Management bid $17 a share for Circuit City Co., and Federated Department Stores Inc., the owner of Macy's and Bloomingdale's, agreed to buy May Department Stores Co. for $11 billion.

Equity firms have between $90 billion and $100 billion in funds, which is spurring the investments in retailers, wrote New York-based Bill Dreher, an analyst with Deutsche Bank.

The price for Neiman "is toward the high end," said Touk Sinantha, an analyst at Chicago-based Ariel Capital Management, whose $21 billion in assets includes 5.7 million Neiman Marcus shares. "There's not a huge cost-cutting opportunity because Neiman is a very well-run company. There is definitely room for expansion."

Demand for luxury items, such as $2,800 Manolo Blahnik alligator pumps at Neiman Marcus, has soared for more than two years. Neiman's same-store sales gain averaged 8 percent the past eight quarters compared with 4 percent for U.S. retailers.

The luxury chain is "a crown jewel, a franchise far superior to any asset in the department store sector, including Saks Fifth Avenue, and one that would be hard to replicate," wrote Dreher, who rates the shares "hold."

Neiman's sales per square foot hit a high of $555 in the year ended in January, up 32 percent from 1997, Chief Financial Officer James Skinner told investors at a conference on March 22. That compared with sales in a range of $350 to $375 for Birmingham, Alabama-based Saks Inc. and Seattle-based Nordstrom Inc., Skinner said.

The company's second-quarter operating margin of 10.6 percent was its highest for that quarter in its history, Greg Fowlkes, an analyst with Morgan Stanley, wrote. The issue for the new owner is that Neiman Marcus leaves little room for improvement.

"Given the relative strength of the ultra high-end consumer, NMG has been able to achieve peak levels of operating performance," wrote Fowlkes, who rates the shares "underweight." "This is going to be hard to top."

Saks, owner of Saks Fifth Avenue, agreed to sell its Proffitt's and McRae's stores to Belk Inc. for $622 million last week to focus on its more profitable luxury chain.