Saks’ stock has risen again to nearly $16, well above our $9 fair value estimate, following a Friday New York Post report that Starwood Capital Group and Canadian retailer Hudson’s Bay have made offers for the company, with another bid possibly coming from a Middle Eastern sovereign wealth fund.
The New York Post report also suggests that Starwood Capital and Hudson’s have both offered $17-$18 per share (with Hudson’s representing an increase from initial $15-$16 bid). Buyout rumors have surfaced several times in the last few years, including a disclosed stake by the owner of luxury footwear maker TODS in 2010 and an unconfirmed report that the New York-based luxury department store would merge with the private equity-owned Neiman Marcus earlier this year, there is a still a level of uncertainty with a potential takeover (as well as the potential for a bidding war).
Although our raising of the uncertainty rating on Saks to extreme implies that we can’t deny there is the possibility of Starwood actually making a bid soon, we continue to see the $15-$16 level as aggressive. Starting with the simplest terms, if the retail firm makes only $0.40 a share in earnings and has little to no growth, a $16 valuation and a stretchpotential $1.00 of earnings would still value the firm at a 16 times forward earnings multiple, which seems aggressive.
Analyzing the value of real estate, if we assume roughly $7 a share (the rumored bid price minus our fair value estimate) is the value per share of real estate assets, if we valued the 5th Avenue store at $1200 a square foot for an estimated 650,000 square feet, and the remaining 3.7 million square feet at $250 a square foot, we’d arrive at the difference in the present value of operating cash flow plus the assumed value of real estate. While both those prices might be aggressive but possible, we are again back to the question of what those real estate assets could be other than Saks retail operations, and if they continue as Saks retail, what payment could the retail firm handle if there were a separation of the real estate assets.
If rent were $100 a square foot for the 5th Avenue store alone, that would imply a $40 million after tax annual payment, or roughly two thirds the earning of the company in 2012 and virtually all the firm’s earnings in 2010. If the intention of the bidder is to unlock value from a sale leaseback transaction, the payment required by the retailer to the newly formed real estate entity would leave thin profitability left to investors and managers on the retail side.
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