Hunting for Luxeury , Retail Giant Buys Saks

When the real estate scion Richard A. Baker acquired the department store chain Lord & Taylor at the market peak in 2006, retail industry players laughed. Mr. Baker, they snickered, was just the latest money guy who would get clobbered trying to break into the fashion business.

No one is snickering anymore.

On Monday, Mr. Baker’s Hudson’s Bay Company announced that it had agreed to buy Saks Inc., one of the oldest and most revered names in luxury retailing, for $2.4 billion in cash, uniting it with Lord & Taylor and the Canadian chain Hudson’s Bay.

The acquisition would create a behemoth in the retail world and cap an extraordinary run of deal making by Mr. Baker. The combined company would own 320 locations, 179 of which are full department stores. It had combined revenues of about $7 billion in the 2012 fiscal year.

Mr. Baker is a dapper businessman who, once he bought Lord & Taylor, swore allegiance to that chain’s Black Brown 1826 private-label suits. Even with that interest in fashion, though, he has largely avoided the follies that have plagued other investors who have gotten into the retail business. He brought in experienced managers (including a handful formerly of Saks), invested in store makeovers and left most of the merchandising decisions to merchants.

“He is more interested in the financials,” said Walter Loeb, a longtime retail analyst.

Under the terms of the deal, the Hudson’s Bay Company will pay $16 a share in cash, about 4.5 percent higher than Saks’s closing price on Friday and about 30 percent higher than its closing price on May 20, the last day before reports about a possible sale surfaced. In New York Stock Exchange trading on Monday, Saks shares rose 4.18 percent to $15.95.

Mr. Baker prevailed over a number of other Saks suitors. Among those who explored a deal were Kohlberg Kravis Roberts, which had floated the idea of injecting money into the chain and then merging it with its rival Neiman Marcus. The Qatar Investment Authority, a sovereign wealth fund of the Middle Eastern emirate, also took a serious look at the company.

Saks drew suitors because it continues to benefit from luxury shoppers who, after closing their wallets during the recession, have come back in force since. Its 2012 sales rose 4.4 percent, to $3.15 billion, and executives say it continues to benefit from foreign tourists, particularly from China, Russia and the Middle East.

While industry experts once questioned whether department stores would stay relevant given competition from the Internet, analysts said Saks’s prime locations, like Fifth Avenue in New York, had held up well.

“No tourist wakes up in New York and says: ‘You know what I’m going to do now? I’m going to log on to the Internet and shop,’ ” said Faye Landes, a retail analyst at Cowen.

Mr. Baker described the Fifth Avenue store as having tremendous financial results “in a neighborhood that has some of the highest rents in the world.”

But Saks also has a number of mall locations that are thought to be less profitable, and it is trying to build an outlet business with its Off Fifth concept.

Mr. Baker, 47, lives in Greenwich, Conn., where he grew up, the son of the shopping mall developer Robert C. Baker. In 2006, restless in the family business, Mr. Baker dove headlong into the retail trade. He teamed up with his father and two real estate investors, Bill Mack and Lee Neibart, to buy Lord & Taylor for $1.2 billion. A couple of years later, he acquired Hudson’s Bay and merged the two into a single business. Last year, he listed the combined company on the Toronto Stock Exchange.

Mr. Baker said there was no overlap between Saks and Lord & Taylor, even though their flagship Fifth Avenue locations are just 11 blocks apart.

“Where Lord & Taylor ends is where Saks begins,” he said.

That is not entirely true; both carry items from midprice clothing brands like Catherine Malandrino, but while those goods, which generally cost $300 to $500, represent the top of Lord & Taylor’s offerings, they are near the bottom of Saks’ price range.

The Lord & Taylor shopper might pick up a Marc Jacobs perfume to own a piece of that brand for less than $100, while the Saks shopper might preorder a $4,395 Marc Jacobs python bag instead.

And Lord & Taylor carries middle-America brands like Jessica Simpson shoes and Kim Kardashian perfume that Saks does not, lest its aura of luxury be sullied.

With the acquisition, Mr. Baker says he plans to push the Saks brand into Canada, where there is only one luxury department store chain, Holt Renfrew. “There’s certainly room for a little competition up there,” Mr. Baker said. Canadian Saks stores will be “on the luxurious side of the U.S. Saks stores,” he said.

As in his previous deals for Lord & Taylor and Hudson’s, real estate is an important component of the Saks acquisition.

Mr. Baker told analysts on Monday that he planned to pool the valuable property of the three separate chains and form a real-estate investment trust, or a REIT, which receives preferential tax treatment. Then, by selling shares of the REIT to the public, Hudson’s can also raise money to help pay down debt.

Other retailers, including the American department store chain Dillard’s and the Canadian food retailer Loblaw, have had recent success executing a similar strategy.

Hudson’s is just the latest owner of Saks, which was founded in 1867 as a privately held company operating as a division of Gimbel Brothers, the now-defunct department store. Horace Saks and Bernard Gimbel opened the flagship Fifth Avenue store in 1924.

In 1973, British American Tobacco Industries acquired Saks Fifth Avenue when it purchased Gimbel Brothers, and then sold it in 1990 to Investcorp International, a Bahrain-based investment firm. Proffitt’s, the Southern department store chain, acquired the company for $2.1 billion in 1998, changed its name to Saks and jettisoned some of its lower-end divisions to focus on luxury. During the recession, though, as shoppers spent less, Saks expanded its cheaper private-label offerings and pushed designers to offer lower-priced options.

Mr.Baker did not specify whether the new company would continue to employ Stephen I. Sadove, who has been chief executive of Saks since 2006. “We don’t have a closed deal,” Mr. Baker said, “so we haven’t had those conversations yet.”

As for Mr. Baker, the acquisition also offers a chance for him to upgrade his wardrobe — Saks’s men’s labels include Armani, Gucci and Ralph Lauren Black Label.

“I’m very fond of our Black Brown,” he said. “But I definitely have more shopping options going forward.”

Source: nytimes

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