Last week’s rumors that Kohlberg Kravis Roberts is eyeing a takeover bid for the American department store fit quite well into the narrative of big private equity firms being forced to pursue big names. The details of the possible bid, which Women’s Wear Daily reports as potentially $52 per share, involved a 30 percent premium on last Tuesday’s closing price.
Meanwhile in the UK, the wrangling for supermarket chain Sainsbury’s continued this week when Robert Tchenguiz, one of the company’s biggest shareholders, rejected an offer of £6 a share from Qatari firm Three Delta.
The move was only the latest in the saga: Sainsbury’s originally rejected a bid of £5.82 per share from a CVC-led group of private equity investors in April.
What the two potential acquisitions have in common is the extensive real estate holdings of each big-name company. Macy’s reportedly owns around half of its real estate, while Sainsbury’s has an £8.6-billion property footprint of its own. Macy’s currently operates 850 stores around the US under the Macy’s banner, while Sainsbury’s has 788 stores throughout the UK. An acquisition of either would come with a hefty real estate portfolio of large stores located in prime areas. In Sainsburys’ case, Tchenguiz has suggested that the company should separate its property assets from the main business, allowing it to sell off its property holdings separately and return the cash to shareholders. But the property assets are surely one of the main factors attracting the private equity bidders.
Both potential acquisitions come at a time of intense interest in the retail sector from private equity firms. In the US, lackluster retail sales resulting from high energy prices and troubles in the housing market have driven many private equity firms to circle the sector looking for a bargain. KKR, which filed to go public last month, recently completed a $7.3-billion acquisition of Dollar General, a discount retail chain with 8,205 stores in 35 states. The firm also closed a $7.1-billion deal with Clayton, Dublier & Rice to acquire US Foodservice from global food retailer Royal Arnold.
Last week Sun Capital Partners bought 75 percent of Ohio-based apparel chain Limited Brands, which has also sold a stake in its Express chain to Golden Gate Capital. And based on its concurrent falling earnings and rising stock price, there has been speculation that chain retailer Dillard’s is just moments from a takeover bid of its own.
However, there is reason to be cautious with these big-name retail acquisitions. Many remember Macy’s previous, highly leveraged purchase by Canadian real estate mogul Robert Compeau in 1988 for $6.6 billion, followed by a disastrous bankruptcy filing less than two years later. Faced with struggling sales, the retailer was unable to support the high level of debt used by Compeau to finance the acquisition.
Still, such past experiences don’t seem to be hampering private equity’s thirst for big-name retailers these days. But the attractiveness of these massive chains may have just as much to do with their hard assets like real estate as with their household names. The combination of both is certainly a hard thing to replicate in retail.
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