Nordstrom Inc. (JWN) - Get Report announced Thursday that members of its founding family are considering taking the department store operator private. But such a deal may not be easy to execute in the current retail environment.
Co-presidents Blake Nordstrom, Peter Nordstrom and Erik Nordstrom, President of Stores James Nordstrom, chairman emeritus Bruce Nordstrom and Bruce's sister Anne Gittinger said in a statement that they had formed a group to explore taking the company private, but had not yet made a proposal. Nordstrom's independent directors formed a special committee to represent the company in a potential take-private. Blake, Nordstrom and Peter Nordstrom all currently serve on the Nordstrom board.
Noting that extensive due diligence would be unnecessary, BMO Capital Markets analyst Wayne Hood predicted that a potential proposal could arrive by the end of the third quarter.
Nordstrom shares jumped 8.5% to $43.92 in afternoon trading Thursday, or about 18% below the $52 per share valuation that Credit Suisse Securities (USA) analyst Christian Buss assigned to the company.
As of March, Blake, Peter, Erik and Bruce Nordstrom and Anne Gittinger owned about 31% of the company's shares. Among comparable retailers, only Dillard's (DDS) - Get Report has similar family ownership conducive to a buyout. The Dillard family controls Dillard's Class B stock, which elects two-thirds of the company's board of directors.
Analysts weren't surprised by the announcement. "The company has been in a heavy investment mode, and current volatility in retail likely necessitates continued investments, which may be easier as a private entity," KeyBanc Capital Markets analyst Edward Yruma wrote in a Thursday note, adding that the family may turn to private equity to bankroll a buyout. "Moreover, this announcement also opens the door for Nordstrom to look at other potential strategic alternatives." He added that the company has a number of undervalued assets, including its e-commerce business (22% of total revenue) as well as Nordstrom Rack (31% of total revenue).
Nordstrom is also relatively less indebted than many of its department store peers, making it a potentially attractive private equity investment. The Seattle company's long-term debt stood at $2.76 billion as of January.
Still, BMO's Hood forecasts hurdles in a potential transaction. By his calculation, a $10 billion transaction, which would represent a premium of roughly 15% over Thursday's closing price of $40.48, would require a $3 billion equity sponsor contribution and a junk credit rating through 2021. At the 30% equity contribution, a potential sponsor could achieve an internal rate of return of 14% to 15%, "making it less attractive to equity sponsors," while a 20% equity contribution could bump up the IRR to a more plausible 20%. "Secular industry headwinds" could make funded debt financing "potentially challenging," Hood added.
Given that Nordstrom is incorporated in Washington, that state's corporate law applies and recent Delaware decisions on appraisal would not apply.
Nordstrom has invested heavily in e-commerce in recent years. The company acquired men's stylist service startup Trunk Club Inc. in 2014 for undisclosed terms and members-only shopping website operator HauteLook Inc. in 2011 for up to $270 million. Nordstrom also invested in menswear e-commerce site Bonobos, which is reportedly in advanced talks to sell itself to Walmart Stores Inc.'s (WMT) Jet.com e-commerce unit.
Retail LBOs have fallen out of fashion amid general sluggishness across the sector. J.Crew Group, taken private by TPG Capital and Leonard Green & Partners in 2011 for $3.1 billion, recently ousted longtime creative director Jenna Lyons and CEO Mickey Drexler as it grapples with a capital structure Moody's Investors Services called "unsustainable." Gymboree Corp., acquired by Bain Capital in 2010 for $1.8 billion, skipped an interest payment to bondholders last week despite some resilience among its fellow children's retailers.
Among the innumerable recent retail Chapter 11 filings are Payless ShoeSource, taken private in 2012 for $2 billion by Golden Gate Private Equity and Blum Capital Partners, and Rue21, which Apax Partners acquired for $1.1 billion in 2013.
Also exploring a sale are Abercrombie & Fitch (ANF) - Get Report , with American Eagle Outfitters (AEO) - Get Report and Express (EXPR) - Get Report rumored buyers; Neiman Marcus Group, which Ares Management and Canada Pension Plan Investment Board took private for $6 billion in 2013; and, reportedly, Staples (SPLS) , which saw its $6.3 billion merger with Office Depot (ODP) - Get Report blocked by an FTC judge last year.
Nordstrom trades at about 5.2 times its enterprise value to Ebitda, according to FactSet, below the comparable company average of 6.3. Canadian department store Hudson's Bay, a rumored Neiman Marcus buyer, trades at a 12.3 multiple, while former Starboard Value LP target Macy's (M) - Get Report trades at 4.3 times.