The Nordstrom family owns 31% of the upscale department store chain. Earlier this month, Nordstrom (NYSE:JWN) announced that the founding family is exploring options to buy the rest of the company's stock.
In this segment from Industry Focus: Consumer Goods, the team discusses how the family would try to finance and execute such a deal. A private equity firm might chip in $1 to $2 billion in equity, but the company would still have to take on billions in debt in any buyout scenario.
A full transcript follows the video.
This video was recorded on June 20, 2017.
Vincent Shen: Nordstrom stock, you mentioned it was down from its highs, since this news broke that some members of the Nordstrom family are looking into their options for taking the company private, the stock is up almost 20%, and the market cap is at almost $8 billion now. Considering the premium that would be required to close a deal, the financial hurdle for the Nordstrom family is pretty tall. What can we expect in order for a deal to happen? Is there going to be a lot of debt necessary? Are they looking at deal partners? What's the situation here?
Adam Levine-Weinberg: Yeah. A few more details have come out over the past couple weeks about what the Nordstrom family is thinking about. They have started a search for a private equity partner to do this deal with them. The goal was to find another private equity company that would put in somewhere from $1 to $2 billion of equity into the deal, and the rest of it would be debt. So what you're looking at is, since the Nordstrom family already owns 31% of the company, depending on the premium, you're looking at maybe $6 to $7 billion cash that they need to come up with to buy the rest of the company. That means that after the private equity contribution, you would need about $5 billion of debt. The good news is that Nordstrom has an A-level credit rating, so it's well into investment-grade now. Now, it would get downgraded quite a bit, probably into junk territory, if you put another $5 billion of debt on top of that. But when you look at what interest rates are these days, the company can certainly afford to make the interest payments that you would have from another $5 billion of debt, especially when you consider that they might eliminate the dividends they've been paying, which has been costing them over $200 million a year. That would almost be enough to pay for the cost of that $5 billion of debt they would need.
I think the company can certainly afford it right now. The risk is, if business takes turns for the worse, then these deals that seem like they're fine from a financial perspective turn into disasters, where all of the sudden you're saddled with debt and you don't have the flexibility that you need to make whatever changes, or just to ride out a retail slump. So there's definitely a risk in that right now, retailers haven't been doing very well for the past few years, but the economy as a whole has been growing. So when the next recession comes around, being a private company, there's definitely some risk that if comp sales fall by 12% or something like that like they did during the recession, do you still have the flexibility to make your debt payments and not find yourself going into bankruptcy because of a short-term decline in the market? Whereas if you have an A-credit rating going into a recession, you can feel pretty confident that you can ride out any potential weakness.