Barneys New York Taken Over by Perry Capital in Debt Swap

Barneys New York has been taken over by Perry Capital in a debt-for-equity swap that reduces the luxury retailer’s borrowings by $540 million, allowing the chain to invest more in its rebounding business.

Perry, which takes over majority control from Istithmar World PJSC, partnered with billionaire Ron Burkle’s Yucaipa Cos. investment firm in the conversion, the New York-based company said yesterday in an e-mailed statement. The transaction will reduce Barneys’s debt to $50 million from $590 million.

The deal allows Barneys to remove the “untenable” debt load it was struggling under without resorting to a bankruptcy, said Steven Dennis, a luxury consultant. It indicates the new owners believe there is “ongoing-concern value” in the chain, although its expansion stores in various cities have not performed as well as its New York and Los Angeles locations, Dennis said.

“It sounds like they are right-sizing the balance sheet,” said Dennis, founder of SageBerry Consulting LLC in Dallas. “It’s a good time to invest in luxury since the market is bouncing back, but it is still a pretty mature market.”

Barneys said its operations have improved, with sales at stores open at least a year increasing at a double-digit percentage rate and earnings before interest, taxes, depreciation and amortization jumping 40 percent. Retailers such as Barneys and Saks Inc. have fared better than lower-priced chains as rising stock markets give wealthy consumers confidence to shop.

Room to Invest

“We’ve had strong operational performance,” Barneys Chief Executive Officer Mark Lee said in a telephone interview, adding that the debt reduction “provides us with lots of runway” to invest in the chain.

Richard Perry, head of Perry Capital, said in the same interview that he will be chairman of the Barneys board and that Perry Capital will have three additional seats. Burkle, Lee and Istithmar will each have a board seat as well, he said. He declined to provide details on the exact size of the resulting equity stakes held by Perry Capital, Yucaipa or Istithmar World.

“This is a long-term investment for us,” Perry said. “I think it is extraordinary what Mark has done.”

Yucaipa sold the debt it owned and used some of the proceeds to take a minority equity stake in the company, said Frank Quintero, a spokesman.

“We will have a voice in the company, but we’re happy with Perry’s control position here,” he said.

Event-Driven Investor

Perry, 57, founded his hedge fund firm in November 1988, after a decade-long career at Goldman Sachs Group Inc., where he worked on Robert Rubin’s arbitrage desk investing in the stocks of merging companies. Perry is a so-called event-driven manager who trades the stocks and debt of companies involved in mergers and spinoffs and those emerging from bankruptcy. He also has invested in real estate loans and private-equity deals and previously sat on the boards of other companies, including FTD Inc. and Sears Holdings Corp. His wife, Lisa Perry, designs a clothing line.

The question is whether Barneys can broaden its customer base without becoming a Saks or a Neiman Marcus Group Inc., said Dennis, the consultant.

“Barney’s image is hipper and younger, and it has a very narrow range of prices because it doesn’t have an opening price point, not much accessible luxury,” he said.

Istithmar, controlled by the state-owned Dubai World holding company, bought Barneys for $942.3 million in 2007 from Jones Group Inc., just before the recession slammed the high-end chains.

Increasing Sales

Barneys hired Lee, 48, in 2010 to become the first CEO since Howard Socol resigned in 2008. Lee previously ran luxury brands Gucci and Yves Saint Laurent, where he was credited with adding new retail outlets and increasing sales.

Founded by Barney Pressman as a cut-rate men’s suit store in 1923, the company began building up women’s lines in the 1970s. It exited bankruptcy protection in 1999 and was bought by Jones for $294.3 million in 2004. It operates nine Barneys and 17 CO-OPs.

Lazard Ltd. and Skadden, Arps, Slate, Meagher & Flom LLP advised Yucaipa on the deal; Kirkland & Ellis LLP and Perella Weinberg Partners LP advised Barneys; Simpson Thacher & Bartlett LLP and Houlihan Lokey advised Perry; Willkie Farr & Gallagher LLP and Blackstone Group LP advised Istithmar.

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