The Deal: Ares and Canada Pension Plan Ring Up Neiman Marcus

NEW YORK ( The Deal) -- Neiman Marcus Group has agreed to be acquired by private equity firm Ares Management and Canada Pension Plan Investment Board from TPG Capital and Warburg Pincus for $6 billion, it was announced on Monday, Sept. 9.

The $6 billion price tag equates to the seller ringing up $3.3 billion at the cash register when about $2.7 billion in long-term debt is deducted from the total purchase price.

The pension plan and private equity firm buyers will each hold equal stakes in the department store chain, according to the announcement, with management holding a minority stake. The deal is expected to close in the fourth quarter. CEO Karen Katz will remain at the helm of Neiman Marcus.

In their 2005 $5.1 billion leveraged buyout of the Dallas-based retailer, TPG and Warburg paid about 9 times the $519 million EBITDA Neiman's generated for the 12 months preceding July of that year. Today, they are selling it for about 9.5 times the $630 million in EBITDA it generated for the 12 months ended April 27.

With their holding period stretching into eight years, Neiman's private equity owners jumped at the chance to sell their portfolio company, rather than risk the longer lockup periods required in an initial public offering, a source said. (Neiman Marcus filed its S-1 for the IPO with the Securities and Exchange Commission in June.)

Yet the auction process was a competitive one, according to another industry source. That source said the IPO was always on the table, given expectations for a robust public offerings market this fall.

This was the second major luxury department store deal this year, following Toronto-based Hudson's Bay Co.'s $2.9 billion purchase of Neiman competitor Saks ( SKS), unveiled on July 9.

The price Hudson's Bay paid for Saks was nearly 11.2 times its estimated $260 million in forward EBITDA for fiscal 2014, ending Jan. 31, 2014. The purchase price was also about 10.7 times the $271 million in trailing EBITDA it generated in fiscal 2013 ended Feb. 2.

That deal gave hope to Neiman Marcus' private equity backers, which sought a multiple closer to the one Saks commanded, sources said. However, Saks' real estate was still considered more of an asset than what was contained in Neiman's real estate portfolio, those sources said.

Neiman Marcus leases most of its store locations, while Saks' real estate is worth about $1.5 billion, including its flagship Fifth Avenue location.

In Neiman Marcus' 2005 leveraged buyout of the Dallas-based retailer, TPG and Warburg contributed $1.23 billion out of a total of $1.47 billion in equity to help finance the buyout. The actual purchase price was closer to $4.7 billion, as the retailer's $400 million to $500 million in cash on its balance sheet was used to help finance the transaction. The remaining $3.2 billion was financed with long-term debt.

The private equity backers also collected a $443 million dividend on March 30, 2012, for a total return of about $3.7 billion, or about 2.5 times the initial total equity investment of $1.47 billion.

Neiman Marcus consists of 79 stores, including 41 Neiman Marcus stores, two Bergdorf Goodman locations on Fifth Avenue and 36 Last Call outlet stores. It operates e-commerce under the Neiman Marcus, Bergdorf Goodman, Last Call and Horchow brand names.

Ares' previous retail investments include Floor & Decor, General Nutrition Centers, House of Blues, Maidenform Brands, Samsonite, Serta, Simmons, Smart & Final and 99¢ Only Stores.

In its June IPO filing, Neiman Marcus said its sales increased from $3.9 billion to $4.5 billion over the last three years, while operating earnings jumped from $317 million to $428 million and adjusted EBITDA bumped up from $527 million to $623 million over the same period.

The department store chain generated cash flow of $233 million by the time of the S-1 filing in June 2013. For fiscal year 2012, the company had $260 million in cash flow as compared to $272 million in fiscal 2011.That cash flow, the company said, has been used to pay off debt and dividends totaling $1.2 billion since October 2005.

Neiman Marcus had about $2.7 billion in long-term debt as of April 27 and about $69 million in cash.

Credit Suisse Group acted as financial adviser to Neiman Marcus, with Cleary Gottlieb Steen & Hamilton giving legal counsel.

RBC Capital Markets and a Deutsche Bank Securities team consisting of Kent Penwell, Keith Wargo, James Lange and Stephen Schlosser provided Ares and CPPIB with financial advice. The financial advisers also provided committed debt financing for the deal. A Proskauer Rose team led by Michael Woronoff acted as transaction counsel and Latham & Watkins served as legal adviser to Ares and CPPIB. Torys provided legal advice to CPPIB.

Written by Richard Collings.

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