Nordstrom Inc. shares rallied more than 10% Thursday but its bonds tumbled after the company said it’s exploring a going-private transaction with the Nordstrom family.
The department-store chain’s
mos active bonds, the 5.000% notes that mature in January 2044, fell to 96 cents on the dollar from as high as 100 cents on the dollar Wednesday, according to MarketAxess.
From Barron’s: For Nordstrom’s stock, another 5% to go
Nordstrom, which is struggling along with peers in a challenging environment for retailers, said family members including Blake Nordstrom, Peter Nordstrom and Erik Nordstrom, all co-presidents; Chairman Emeritus Bruce Nordstrom; President of Stores James Nordstrom; and Anne Gittinger have formed a group to explore the possibility of acquiring 100% of the shares outstanding.
Bruce Nordstrom, grandson of co-founder John Nordstrom, owned 15% of the shares outstanding as of March 17, according to FactSet, and Gittinger, another of the founder’s grandchildren, owned 9.2% of the shares outstanding.
The company is creating a special committee of independent directors to act on its behalf. It has hired turnaround firm Centerview Partners LLC to act as financial adviser and Sidley Austin LLP to act as legal counsel.
“For a retailer, a go-private transaction can allow the company to execute an operating strategy with a longer-term mindset, given the quarterly earnings focus of many equity investors,” said David Silverman, senior director of corporate debt at Fitch Ratings. However, “the impact of a go-private transaction on ongoing cash expenses is dependent on debt required to complete the transaction, which could increase ongoing interest expense,” he said.
Nordstrom has $2.7 billion of long-term debt, according to FactSet, most of it in the form of bonds. It had $653 million in cash and short-term investments at the end of the first quarter.
With the Nordstrom family owning about 30% of shares already, family members essentially satisfy the typical “equity component” desired by suitors in most leveraged buyouts.
That “raises the odds of a deal getting done,” said Chuck Grom, analyst at Gordon Haskett.
Grom said that leaves the need to raise about $5.45 billion of additional debt to fund the takeout, which would imply an EBITDA multiple of 6.8 times. As background, that’s some 28% lower than the average retail LBO of 9.4 times since 2006, which could also entice private equity to get involved, he said.
Nordstrom’s move comes as the retail sector suffers through a period of major upheaval amid changing consumer behavior, falling mall traffic and a shift toward e-commerce, especially favoring Amazon.com Inc.
. That has forced companies to invest heavily in their own online and delivery systems, at a time when they are fighting for market share and revenue growth.
A number of retailers have filed for bankruptcy in the last year, including Rue21, Payless ShoeSource, Eastern Outfitters, Wet Seal, American Apparel, Aéropostale Inc.
and Sports Authority. The list of retailers that are close to default or have debt that is distressed is long, and includes such storied names as J. Crew, Sears Holdings Co.
, Gymboree and Neiman Marcus.
Some of the most distressed retailers are those that were taken private in the leveraged-buyout boom of the early 2000s, which has left companies saddled with billions of dollars’ worth of debt. The cost of servicing that debt, even with relatively low market interest rates, is another burden in a period of weak sales. Some, like J. Crew and Neiman Marcus, are seeking to ease the burden with some maneuvers that are putting them at odds with creditors.
In the first quarter, Nordstrom reported earnings that were in line with expectations, but same-store sales fell short at the flagship stores, as well as at its Nordstrom Rack off-price business, an area that has outperformed. Blake Nordstrom said at the time there was no one factor to pinpoint as the cause of the decline, but said the company was expecting flat same-store sales.
Fitch’s Silverman said Nordstrom’s omnichannel strategy includes store remodels, website and inventory system investments and other measures that are longer term in nature, a view shared by others.
“For Nordstrom, this may signal an opportunity to alleviate some of the pressure applied by Wall Street to deliver strong profitability and revenue growth, instead allowing them to reinvest profits back into their physical and digital experiences, further accelerating their position as a leader in the digital and omnichannel space,” said Chad Bright, sector lead for department stores at research firm L2.
Bright agreed that the strong family presence at Nordstrom will make it easier to push through a deal, giving it an avenue that rivals may not find viable.
“Given the continued oversaturation of physical stores in the US, we believe department stores will continue to be challenged to rethink their physical footprint to deliver more (and more profitable sales), particularly in the face of Amazon’s continued growth within apparel and fashion,” he said.
In the equity market, Nordstrom shares have fallen about 6% in 2017, while the S&P 500
has gained 8.7%. The SPDR S&P Retail exchange-traded fund has fallen 8% in 2017.