Tuesday, November 6, 2007

Private Equity 's "Time Out" May Give Lampert His Opening

Some thoughts on the effect of current credit conditions and whether or not they now give Sears Holdings (SHLD) Eddie Lampert an opportunity to make a long awaited acquisition at prices he will pay.

Drastically tightened credit markets have lead to a sudden withdrawal by PE firms making potential buyouts. With both credit and terms of it becoming less advantageous, many deals that PE firms would have made before are now attractive only to strategic buyers who can merge operations.

A look at the restaurant industry shows earlier deals by PE buyers included OSI Restaurant Partners (Outback Steakhouse) acquisition by Kangaroo Holdings, Long Star Steakhouse's purchase by Lone Star Funds, and Ryan's Restaurant Group's acquisition by Caxton-Iseman Capital.

Now, if we look at recent deals we see that strategic buyers are the ones doing deals now. Applebee's (APPB) pending $2 billion purchase by IHOP (IHP) is as transaction most people thought would go to a private equity firm. Rare Hospitality's (RRH.BE)$1.4 billion acquisition by Darden Restaurants (DRI)., which operates Olive Garden and Red Lobster, closed just last month.

Back in June there was talk about Sears Holdings making a bid for Macy's and at the time I said "Should we root for this? Yes. If Lampert goes for it, he is seeing value in the assets and name far in excess of the current price. The plus of having Lampert buy it? He will have the ability to quickly extract that value for shareholders, of which, we must always remember, he will be the largest one."

I also said that a deal then was unlikely due to Macy's (M) price at the time. But, consider now that shares have dropped over 25% since then and if Lampert were to make a run at the retailer, he now likely would be the only bidder, lowering any potential price.

Why would Lampert want Macy's? Probably because of the value of it is along the same lines as Sears when he bought it. The retailer owns more than half of its 858 Macy's and Bloomingdales stores. The rest the company stores it leases or owns on leased land. Owning Sears, Kmart, Bloomingdales and Macy's would make Lampert option #1 for anyone wanting footage for retailing. It would also give Lampert a stunning array of options to increase shareholder value of which, it bears repeating, he is by far the largest.

Macy's has a market cap of $13 billion about 2/3 that of Sears. Without any significant debt currently ($2.6 billion) and over $1 billion in cash assuming they complete the recently authorized $1.5 billion buyback this quarter, Sears could do the deal easily. Macy's produces about $4 billions a year in cash from operations and Lampert would save another $275 million by eliminating the dividend.

PE firms were causing a bidding war for companies earlier in the year and with their specter drastically reduced, it may be the time for Lampert to make his next move.

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