It was barely a year ago that Nordstrom's (NYSE:JWN) independent directors rejected a $50-per-share offer from the Nordstrom family to take the storied retailer private. However, following a roller-coaster 12-month period that has seen the stock surge and then crash, the founding family is again looking at options to regain control of their namesake company.
So far, there doesn't seem to be a firm plan, according to The Wall Street Journal, which first broke the news of the Nordstrom family's renewed interest in gaining control of the retailer. Let's take a look at some of the possibilities and what they could mean for shareholders.
Going private is still unlikely
A bid to take Nordstrom private is even less likely to succeed today than it was a year or two ago. During the family's effort to line up financing for a takeover in late 2017 and early 2018, lenders demanded interest rates as high as 13%. That forced the Nordstrom family to make the lowball offer of just $50 per share that the independent directors rejected. A higher offer would have required taking on even more debt.
Nordstrom's earnings before interest, taxes, depreciation, and amortization (EBITDA) declined in fiscal 2018 and fell further in the first quarter of fiscal 2019. Nordstrom was hardly the only retailer to see its financial performance take a turn for the worse recently. This will make lenders even more reluctant to finance a buyout that would dramatically increase Nordstrom's debt load.
The recent plunge in Nordstrom stock -- it briefly traded below the $30 mark last month -- might make a buyout for less than $50 per share seem like a potential option. A lower offer price would reduce the cost of going private, after all.
However, just last fall, Nordstrom shares traded for more than $60, as the company seemed to be making a comeback. Most shareholders would probably be reluctant to accept a buyout offer at a price vastly below Nordstrom stock's 52-week high. (I am a Nordstrom shareholder myself, and I would not support a buyout for less than $60 per share.)
Furthermore, many of the independent directors are wary of letting the founding family gain control of the company at a rock-bottom price when their management mistakes have caused much of the stock's decline. (Two members of the Nordstrom family serve as co-presidents of the company.)
A share buyback or tender offer would be more realistic
Given that members of the Nordstrom family already own about a third of the retailer, they don't have to raise their stake all that much to gain control of the company. They may be able to buy some additional shares to get closer to the 50% threshold. A buyback or tender offer sponsored by the company could get the family over the hump by shrinking Nordstrom's share count.
In fact, at Nordstrom's investor day a little over a year ago, management revealed plans to spend about $3.7 billion on share repurchases by 2022. As of a few months ago, the company had bought back a little less than $900 million of stock under that multiyear plan, leaving $2.8 billion to go.
Based on Nordstrom's current rock-bottom stock price, $2.8 billion would be enough to shrink the share count by more than 50%. Even a 35% to 40% reduction in the share count would give the Nordstrom family a majority stake in the company, particularly if any of the family members were to accumulate additional shares.
How much debt is too much?
The main problem with launching a big tender offer is that while Nordstrom has a pretty good balance sheet right now, even an extra $1 billion of debt would likely leave it with a junk credit rating. That would put it at risk of falling into distress if its earnings power weakens further.
That said, Nordstrom ended the first quarter with a healthy $448 million cash balance, despite posting negative free cash flow of $240 million during the period. Cash flow likely rebounded in the seasonally stronger second quarter, creating some capacity for additional buybacks. Asset sales related to some of Nordstrom's recent store closures also could provide some firepower for share repurchases.
Moreover, there's a good chance of an earnings recovery at Nordstrom over the next few quarters. Nordstrom will open its long-anticipated Manhattan flagship store in October, which will allow it to start making money from a store that has only been incurring costs thus far. Its off-price Nordstrom Rack division remains fundamentally healthy, despite some missteps earlier this year. And the retailer has finally started to move more aggressively to close underperforming stores in 2019, which should support improved performance.
The high likelihood of an earnings rebound could justify taking on a few hundred million dollars of incremental debt to opportunistically accelerate some of Nordstrom's planned share buybacks. Combined with Nordstrom's free cash flow, that might enable the company to reduce its share count by another 10% to 15% by year-end.
This would get the Nordstrom family a little closer to owning a majority stake in the retailer. But any attempt to take on even more debt in order to buy back stock at a faster clip would be too risky to be a positive move for shareholders.