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.
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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