Luxury – A Deal at $5 Billion
By George Anderson
The cost of luxury is quite high – precisely $5 billion.
That’s what it cost the equity firms of Warburg Pincus and Texas Pacific Group to buy the luxury retailer Neiman Marcus.
With the deal, the new owners acquire 35 Neiman Marcus and two Bergdorf Goodman stores along with the company’s catalog and online operations.
Unlike other recent deals for large retailers, the Neiman Marcus sale did not represent a troubled company looking for a white knight of sorts.
The luxury chain has experienced consistent and strong growth with six straight quarters of double-digit gains in its same-store numbers.
The sale, according to various reports, was made because of Richard Smith’s, chairman of Neiman Marcus, desire to sell his stock in the company. According to a report in The Wall Street Journal, “the Smith family owns 12.7% of Neiman stock, and 31.1% of the company’s Class B shares, as of the company’s latest proxy filing. The Class B shares command about 80% of the vote of the board of directors. Mr. Smith’s son, Robert, and son-in-law, Brian Knez, serve as vice chairmen of the Neiman Marcus Group.”
The company’s chief executive, Burton Tansky, and other top executives are expected to remain in their positions after the sale.
Moderator’s Comment: What do you 1) think about the Neiman Marcus deal and 2) about the recent merger and acquisition activity in the retail business?
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George Anderson – Moderator
What I found most interesting in the Wall Street Journal article is the comment from Warburg Pincus partner Kewsong Lee who said that the move was more about a long-term play on the continued spending in the luxury segment than a play on retail. That’s $5 billion dollar play. I’d say that’s confidence in the luxury market.
The Neiman Marcus acquisition, although it’s in the same department store and retail sector as the Belk-Profitt’s, Federated-May and Sears-Kmart deals, is driven by a different logic.
In contrast to the rationality that retail chains and department store operators get form consolidation, such as increased operational efficiencies, greater bargaining power with vendors, and the need to leverage and rationalize their real estate assets, the Neiman Marcus acquisition looks to gain from a momentum in luxury consumption that apparently still has a lot of room for growth, and not necessarily only within the USA.
However, the price tag of the Neiman Marcus acquisition and the fact that it’s being acquired in the top of its game, makes me cautious about the potential of the deal to reap clear financial benefits for the private equity firms in a reasonable time frame.
In addition to adding Neiman Marcus locations nationwide, Texas Pacific and Warburg Pincus will need to export and develop the Neiman Marcus concept abroad to be able to drive additional value to their investment.
And although Texas Pacific Group has experience managing assets in Europe, I wouldn’t be too sure that Neiman Marcus would be a strong player in that part of the world given the tough competition already catering extremely well to the European upper end consumer. Maybe they should be bold and try their hand at markets such as Russia and China that have an insatiable appetite for luxury and have the greatest growth prospects.
Without knowing the details of Neiman’s earning stream, it’s pointless to speculate on the premium that was undoubtedly paid. However, what this transaction has in common with the recent wave is the leveraging of brand equity.
Federated’s acquisition of May was an integral step to the long term vision of a national department store chain. Economically, it made incredible sense. Efficiencies in back office, advertising, supply chain and merchandising overhead were clear and real. But what made the thing work was the depth of equity present in the Macy’s and Bloomingdale’s brands…and the lack thereof in most of the May brands.
Conversly, it was the lack of equity present in the Sak’s chains which made that transaction work. The Belk deal is a “scale” and “location” merger, made possible because of the economies of simply adding “zeros” to existing responsibilities, systems, and overhead. Look at what Sak’s is choosing to hold on to…the chain with the brand equity which commands a premium.
Barney’s is a prestige outlet for many of The Jones Group’s products. Within it’s niche, Barney’s has incredible brand identity and equity. That equity creates leverage, and with it, the opportunity for growth and profit.
Underlying all four transactions is a fundamental truth: all other things being equal, it’s easier to make money in the luxury niche than in the “value” niche. Further, brand equity has more meaning in the luxury niche.
In theory, each of the transactions seems to make sense (depending on the Neiman’s premium). It’s the ability of management to execute to the rationalizing strategies that will determine in the end if the decisions were good, bad or indifferent.
So here’s the obvious truth: nurture, sustain, cultivate and maintain your brand and good things will follow. Wow, wouldn’t it be great if it was that easy?
Every event has an agenda! The Smith clan appears to want to cash out; the top executives at NM appear to want to stay on in a company with a higher perceived prestige and value. Lots of people will continue to buy premium-priced merchandise for its psychic value; the upper-end of the retail industry will continue its surge; and this will impart additional impetus for further consolidation in the overall retail environment. These are the things that make Sammy run.