The Deal: Saks Languishes on Sale Rack

NEW YORK ( The Deal) -- Southeastern Asset Management's move to slash its stake in Saks ( SKS) from about 19.2%, to 11.4% is likely an ill omen for a potential sale of the retailer.

The investor, which held about 29.5 million shares as Feb. 14, now owns about 17.4 million shares, according to filings with the Securities and Exchange Commission. Southeastern's move to cut its stake may indicate that a deal is further off than thought or a likely bid will not be much of a premium to Saks' current share price.

Rumors of a possible transaction have swirled around the luxury purveyor since early spring, including a reported plan by private equity firm Kohlberg Kravis Roberts ( KKR) to invest in Saks and merge the company with competitor Neiman Marcus Group. Apparently those talks went nowhere.

In late May, Saks hired Goldman Sachs ( GS) to pursue strategic alternatives, a move that was viewed at the time as a defensive measure.

Recent reports and rumors have pegged Qatar Holdings, Hudson's Bay Co.and Starwood Capital Group as potential bidders for the venerable department store chain. Of the likely buyers, Hudson's Bay makes the most sense, since as a strategic it is best positioned to take advantage of any synergies and resulting cost savings.

In fact, Hudson's Bay is indeed taking a look at acquiring Saks, according to a source.Saks had cash of $20 million and total debt of about $317 million as of May 4, according to Bloomberg data, giving it an enterprise value of nearly $2.5 billion. That would be about 9.6 times its nearly $260 million in estimated EBITDA for fiscal 2014, ending Jan. 31, 2014.

As a mature business, Saks does not have much room for growth, according to a source, making a purchase of the company expensive. Saks' shares on Wednesday afternoon traded down nearly 1%, to $15.22 a share. Assuming a premium of about 20% to Saks' current share price, the company would have a market capitalization in the neighborhood of $2.6 billion and an enterprise value of about $2.9 billion, or over 11 times EBITDA.

If Saks' Fifth Avenue location in Manhattan is factored into the equation--an asset that Hudson's Bay and others are interested in, according to the source--a deal could be more palatable for a buyer. That real estate is said to be worth up to $1 billion. With a sale-leaseback calculated in, suddenly Saks looks to be more affordable, but such a move would also cut into Saks' long-term profitability, as the retailer would have to start paying rent on the location.

Nonetheless, the source noted that the timing of Southeastern's stake sale does not bode well for a potential deal. While a sale cannot of course be ruled out, the fact that Southeastern has begun to cash out of its investment amid rumors of a potential sale likely means the shareholder does not think a transaction will come to fruition--at least not at a large premium.

Written by Richard Collings.

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