What the Saks Deal Means for Neiman Marcus Stores

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Canadian-based Hudson's Bay has announced that it will purchase luxury retailer Saks (UNKNOWN: SKS.DL2  ) for $16 per share in a deal valued at $2.9 billion. The appeal here for Hudson's Bay is interest in Saks' high-end real estate. In fact, the department store chain's Fifth Avenue Manhattan address alone is worth an estimated $805 million, according to Deborah Weinswig of Citigroup.

Nevertheless, this isn't bad news for Saks shareholders, since the struggling retailer will sell at a nearly 5% premium to where the stock closed on Friday. Still, it may be even better news for rival luxury retail chain Neiman Marcus. That's because this premium on the Saks sale could help privately held Neiman Marcus score a higher valuation as it sets up for a possible initial public offering. Earlier this year, the retailer reportedly brushed off a buyout offer from private equity firm KKR (NYSE: KKR  ) , which had hoped to later merge Neiman Marcus with Saks.

In hindsight, this may have been a smart move for Neiman Marcus. Here's why.

More pull for a possible IPO
If Saks was able to sell at a premium, it's likely that Neiman Marcus will get a boost as well. Consider this: Neiman generated $140 million in profits on revenue of $4.35 billion last year. That's more than double Saks' profits for its most recent fiscal year. Having a more profitable structure than industry rivals could help muster demand for a possible Neiman IPO.

Last month, the company filed for an initial public offering valued at $100 million in stock. However, one downside for potential investors is the fact that all proceeds from the IPO would go to Neiman's owners and not toward the company's future growth. If the IPO were to happen, TPG Capital together with Warburg Pincus would be cashing out after owning Neiman Marcus for nearly eight years.

For now, we'll have to wait until more details emerge on what Neiman's valuation may look like ahead of a possible IPO. 

In spite of that, one thing is clear: The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape.

To better understand the opportunities in retail today I encourage you to read this special free report from the Motley Fool: 3 Companies Ready to Rule Retail. Uncovering these top picks is free today; just click here to read more.

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Related Tickers

12/31/1969 7:00 PM
SKS.DL2 $0.00 Down +0.00 +0.00%
Saks, Inc. CAPS Rating: *
KKR $14.02 Down -0.05 -0.36%
KKR and Co. CAPS Rating: ****