KKR Said to Weigh Push for Saks-Neiman U.S. Retail Merger

KKR & Co., the private-equity firm run by Henry Kravis and George Roberts, is weighing an investment in Saks Inc. and may seek a merger with rival Neiman Marcus Group Inc., said people with knowledge of the matter.

The deliberations may not lead to a transaction, said one of the people, who asked not to be named as the process is private. It wasn’t immediately clear whether KKR had approached New York-based Saks.

Merging the two would create an upscale department-store chain with more than $7 billion in annual sales, second only to Nordstrom Inc. in the U.S. Both Saks and Neiman Marcus recently hired advisers to explore strategic options including sales, people with knowledge of the matter said this month. If combined, the two could cut costs by closing stores, one person said.

“You could obviously get a huge benefit to the bottom line,” Michael Appel, founder of the retail consulting firm Appel Associates LLC in Purchase, New York, said in a telephone interview yesterday. “You could keep the customer-facing part of the business -- the branding, the merchandising -- separate but you could then collapse the two back ends of the companies, like logistics, sourcing. You would get tremendous operating leverage.”

Saks shares rose 13 percent to $15.50 in New York yesterday, after earlier advancing as much as 18 percent following Bloomberg’s report.

Buying Retail

KKR, based in New York, had more than $78 billion in assets under management at the end of March, and has a long history of buying retail and consumer companies. In 2005 and 2007, the firm snapped up Toys “R” Us Inc. and Dollar General Corp. for $7.5 billion and $7.3 billion, respectively, according to data compiled by Bloomberg.

Saks hired Goldman Sachs Group Inc. for advice on its options, two people with knowledge of the matter said. The department-store operator may be exploring a sale now because its shares had increased by almost one-third this year through May 21 and interest rates are low, giving potential buyers cheap financing, one of the people said.

Neiman Marcus is working with Credit Suisse Group AG on exploring an initial public offering or sale, according to people familiar with the matter. Its owners may seek about $8 billion for the company, which has about 40 namesake department stores and owns Bergdorf Goodman’s two stores in New York, the people said. TPG Capital and Warburg Pincus LLC bought Neiman Marcus in 2005 for about $5 billion, data compiled by Bloomberg show.

Luxury Retailers

Saks generated revenue of $3.15 billion in the year ended Feb. 2. That compares with $4.35 billion in Neiman Marcus’s latest fiscal year, which ended in July. Luxury retailers fared better during the economic recovery than some of their lower-end counterparts as surging stock markets gave the wealthy the confidence to shop.

A Neiman Marcus and Saks combination could benefit from closing some duplicate stores in the same malls, consolidating distribution centers as well as achieving efficiencies in advertising, Mortimer Singer, president of New York retail consulting firm Marvin Traub Associates, said in a telephone interview yesterday.

Combining the chains under one name “would be a very tough decision,” Singer said. “They are both such wonderful brands. They are very iconic nameplates.”

Affluent Customer

Saks posted a first-quarter profit of $20 million, a 38 percent decline compared with a year earlier. Excluding items, profit totaled 19 cents a shares, ahead of the average estimate of analysts of 18 cents. Revenue advanced 5.2 percent to $793.2 million, also exceeding estimates.

Neiman Marcus’s fiscal second-quarter net income gained 0.9 percent to $40.4 million as sales advanced 6.5 percent to $1.36 billion.

Following Saks’s 25 percent share-price surge over the past two days, the stock is valued at about 36 times earnings, according to data compiled by Bloomberg, compared with a price to earnings ratio of about 16.9 for Nordstrom and 14 for Macy’s Inc. Department stores in North America are valued at about 17.5 times earnings.

Neiman Marcus and Saks are fighting for the same affluent customer with slightly different brand rosters that include their own exclusive goods from designer brands, Singer said. Macy’s ownership of Bloomingdale’s works because the customers don’t overlap much, he said.

Landlord Leases

Saks, Neiman Marcus, Barneys New York Inc. and Bloomingdale’s each operate fewer than 50 namesake stores. Nordstrom has 117. In comparison, Macy’s has more than 800 locations after acquiring May Department Stores Co. and paring down the combined companies. Macy’s has more than $27 billion in annual revenue.

A combination of Neiman Marcus and Saks would have “a fair number of complications,” including getting out of landlord leases and figuring out how to differentiate the brands, Steven Dennis, founder of Dallas-based SageBerry Consulting LLC, said in a telephone interview yesterday.

Such considerations dissuaded Neiman Marcus from pursuing an acquisition of Saks in 2007, said Dennis, who was a Neiman Marcus senior vice president at the time.

‘Premium Prices’

“Today you are talking relatively premium prices for premium brands, so to make the numbers work you would have to have a lot of synergies,” Dennis said.

Deborah Weinswig, an analyst with Citigroup Inc., said Saks could achieve significant improvements in its own operations in the hands of “the right acquirer.”

Saks could close an additional five to 10 stores, speed the fusing of its store and online operations, accelerate the expansion of its outlet-store chain, grow more internationally and improve its operating margin, which lags Neiman Marcus’s, she wrote in a note to clients yesterday.

Weinswig, based in New York, said she first considered Saks as a takeover target in January 2006. She rates the company’s shares as neutral, the equivalent of hold.