PE and Clothing Stores
I am very interested in knowing your opinion on clothing store LBOs, like the Eddie Bauer one announced yesterday or the Burlington Coat deal by Bain.
What is the extraordinary value to be extracted out of these companies which are no clear leader of their segments and concepts. Is it purely a financial play? Or competition for targets too intense?
For your information: Eddie Bauer agreed to be acquired by affiliates of Sun Capital Partners and Golden Gate Capital,for roughly $614 million, including debt assumption of $328 million. The deal values Eddie Bauer shares at $9.25 each, a 12% premium over the stock’s average closing price for the prior four weeks. The stock closed Friday at $8.85, down 6.6%. Eddie Bauer sells casual sportswear and accessories for what it calls the “modern outdoor lifestyle.”
The company says its products are available at about 380 stores throughout the U.S. and Canada, through catalog sales and its websites. It also says that the acquisition is the result of a review of strategic alternatives begun in May 2006. “We believe that the transaction will provide Eddie Bauer with new resources and the time necessary to execute our turnaround strategy,” Chief Executive Fabian Mansson said in a statement. The deal is subject to shareholder approval and is expected to close in the first quarter of 2007.
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Credit Guy said on November 14, 2006
I don’t know enough about the clothing segment to comment specifically about these two deals. Instead, I follow retail in general and food segments in particular. In the food segment deals, Sun has tended to take a sum of the parts valuation approach and is purchasing asset portfolios with the intent of separating out the parts and monetizing the parts that they don’t want and focusing on the core business. ShopKo is a prime example of this and Marsh, I suspect, will follow a similar path. I don’t know if EB has a similar makeup to allow for this financial engineering approach that Sun seems to favor. In my view, it is purely a brand play with potential synergies for ShopKo and Mervyns, two outlets where the EB brand could become a store within a store. If so, I hope that they watched what Sears did with Lands End and trys a different approach.
Looking ahead, I have to think that the future should be deal rich for the food segments as scale should help in the fight against Wal-Mart. Canada’s big three supermarkets command 51% of the food market. In the US, the big three command about 24%. Even with Wal-Mart, the share only climbs to about 41%. Consolidation has to be in the future, doesn’t it?
MisterX said on November 14, 2006
I obviously don’t disagree with the general skepticism. In the case of Burlington, they had a very low store count compared to other clothing stores selling similar merchandise at similar price points. Why they couldn’t be more growth-minded when the company was 60%-family owned is another question. They also had a long-tenured senior management team they were able to align with their growth initiatives (sorry, but I’m still a believer in that aspect of the market, even if it sounds like it’s out of a flip-book). Obviously reducing costs was part of the plan – Burlington’s operating margin was only 5% when it went private.
On the broader question about the sector, there’s no denying the financial engineering aspect. Both the names you mentioned were “under-leveraged†in the private market context. Also, the PE firms are experts at working capital management, which obviously is a big component of retail operations.