Retail Buyout Buzz Is Deafening

J.C. Penney, among others, surges on rumors of private-equity interest.
By Nat Worden ,

Simmering buyout rumors came to a boil in the retail sector Thursday as shares of

J.C. Penney

(JCP) - Get Report

,

Saks

(SKS)

and

Neiman Marcus

(NMG)

took off on unconfirmed talk of pending deals at the companies.

J.C. Penney was recently up $3.90, or 8.1%, to $51.80 on rumors that Cerberus Capital Management, a private equity firm that recently hired a former executive from the company, was negotiating a deal to buy it.

Tim Lyons, a spokesman for J.C. Penney, said the company has no comment on the rumors or the move in its stock.

Separately, Saks was up $1.56, or 9.4%, to $18.11 after

The New York Times

reported that the company put its regional stores up for sale and is considering selling its Saks Fifth Avenue chain, citing executives close to the company.

The board of Saks has hired Goldman Sachs and Citigroup to "explore strategic alternatives" for its properties, the report said.

Also, Neiman Marcus was adding $3.03, or 3.4%, to $90.73 on speculation that its ongoing auction, run by Goldman Sachs, would soon be closed. Potential bidders include private equity players like Kohlberg Kravis Roberts & Co. and Bain Capital; Thomas H. Lee Partners and Blackstone Group; Apollo Management and Leonard Green & Partners; and Texas Pacific Group.

Meanwhile, the S&P Retail Index was up 0.5%.

While consolidation at the other retailers has been expected for some time now, the rumors surrounding J.C. Penney and Cerberus constitute a new development, and some observers have their doubts.

"This deal doesn't smell right to me, and I wouldn't be surprised if it doesn't happen," said Howard Davidowitz, chairman of the retail consulting firm Davidowitz & Associates. "J.C. Penney has fixed their balance sheet, and they're cash-rich now. So, they would be in a position to defend themselves aggressively.

"It would have to be a hostile takeover unless they were offered a huge premium, and I don't know why someone would offer a lot of money for a slow-growth department store right now," he added.

Lending credence to the speculation, Cerberus recently hired Vanessa Castagna, a former J.C. Penney executive who led the retailer's turnaround under its former chief executive, Allen Questrom. Castagna left the company after being passed over for the top spot for its current leader, Myron Ullman.

Cerberus hired Castagna to boost its turnaround efforts at Mervyn's, a department store chain the firm bought from

Target

(TGT) - Get Report

last September for $1.65 billion in cash. Now, it is rumored to be leading a consortium to buy J.C. Penney, a chain that has a similar customer base to Mervyn's, along with the Carlyle Group. The firm could be trying to meld the retail operations of the two chains and swap out underperforming retail assets.

Between the recent selling of

Toys R Us

(TOY)

, an attempt to buy

Circuit City

(CC) - Get Report

by Highfields Capital and the merging of Kmart and Sears, masterminded by hedge fund guru Ed Lampert to form

Sears Holding

(SHLD)

, the public retail sector has been a hotbed for private investment activity of late.

Observers say the off-mall real estate portfolios of Toys R Us and Circuit City probably hold untapped value in the eyes of their suitors. Meanwhile, the linchpin for Lampert's strategy is widely believed to involve the shifting of Sears retail operations that have suffered in their mall-based locations over to off-mall Kmart locations. Such a strategy also could be used to justify the marriage of J.C. Penney and Mervyn's, beacuse Mervyn's was widely coveted for its off-mall properties, despite its lackluster retail performance.

"The Mervyn's customer is the J.C. Penney customer, but Mervyn's is off the mall," Davidowitz said. "Everybody is trying to get off the mall now, and that could be the logic behind what Castagna and and Cerberus are trying to do."

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