The next retail chains to go private
Gap, Zale, Academy Sports among those that may get scooped up by private equity firms.
By Parija B. Kavilanz, staff writer

NEW YORK ( -- -- Private equity firms, flush with more than $200 billion in cash, have been aggressively mining the retailing sector over the past 12 months for acquisition targets.

This year has already seen a total of 10 leveraged buyouts (LBOs) valued at more than $30 billion, including Petco, Tommy Hilfiger and Michaels Stores.

Bill Wetreich, a Standard & Poor's retail sector analyst, expects that the buying binge for retail brands will accelerate in the second half of the year, citing several factors.

First, it's been a fairly favorable environment for consumer spending and retail sales.

Consumer spending rose by 0.4 percent in June, which was down from a 0.6 percent gain in May, but still indicates that despite the pressure of higher gas and energy prices, consumers are still continuing to shop, albeit at a slower pace. This makes the retail sector attractive to private equity funds versus the general market, said Wetreich.

Second, these funds like the fact that retailers typically generate lots of cash and carry relatively low levels of debt on the balance sheet relative to their sales.

Third, most retailers own their own real estate. This gives buyout firms the flexibility to fund their buyouts by selling part of the retailer's real estate to a real estate investment trust and then leasing the space back for the company from the REIT.

What are they buying?

Buyout firms prowl for two types of retail candidates: brands that are on top of their group and those that are viable turnaround prospects.

Neiman Marcus is a good example of a strong performer, said Fred Crawford, managing director with AlixPartners, a corporate turnaround and restructuring advisory firm. The luxury retailer was acquired last year by a pair of private equity firms, Texas Pacific Group and Warburg Pincus LLC., for $5.1 billion.

In this instance, Crawford said the firms bought a leading brand with the intention to infuse more capital into it to spur growth

In the turnaround category is Toys R Us, which was was struggling when it was acquired last year by a group of private investors led by Kohlberg Kravis Roberts & Co., Bain Capital and Vornado Realty Trust for $6.6 billion.

Taking a public retailer private keeps the company out of the spotlight on Wall Street and accelerates the turnaround process.

With turnaround candidates, firms typically have a short-term exit strategy of three to five years, taking the retailer public or selling it to another buyout firm once the restructuring is complete.

On the radar

Given the advantages inherent in a retail LBO, who else is bait for a buyout?

Gap, Inc. (Charts) could be a target. "The company has three strong brands in the Gap, Old Navy and Banana Republic but it has a fairly complex management structure and it's a cumbersome company," said Crawford.

Moreover, Gap has suffered sales declines for 11 out of the past 12 months, while its stock price has fallen more than 20 percent over the same period.

"But this brand is still very relevant in the marketplace," Crawford said. "A buyout firm or firms could acquire it, turn it around or potentially even breakup the company,"

Privately-held Academy Sports is another possibility. Said Crawford, "Academy is a $1 billion sporting goods regional chain, mostly concentrated in the south. They sell equipment and clothing for any outdoor activity like hunting, fishing and camping." The company operates more than 80 stores in 10 states but is growing fast, he said.

A private equity play would give it more capital to open more stores quickly in anticipation of an IPO.

Jewelry retailer Zale Corp. (Charts) is another name to keep an eye on. "Jewelry retailers are under attack from Wal-Mart and online competitors like There's a potential real estate opportunity with Zale," said Crawford.

Zale, which operates more than 2,300 jewelry stores in North America, took a hit from weak sales during last year's holiday season. Last month the company announced it terminated merger talks with Britain-based specialty jeweler Signet Group PLC.

Electronics seller Radioshack (Charts) is also a target, said Howard Davidowitz, chairman of New York-based retail consultancy and investment banking firm, Davidowitz & Associates.

Shares of Radioshack, which operates more than 5,000 stores across the U.S., are down more than 30 percent over the past 12 months in the face of robust competition for its business from both industry leaders Best Buy (Charts) and Circuit City (Charts) and mass merchant chains like Wal-Mart (Charts) and Target (Charts).

"Any retailer whose share price is falling but is still generating cash is on the LBO radar," said Davidowitz.

Indeed, Davidowitz predicts a "major" retail shakeout will unfold in the months ahead because "there are just too many retailers out there that look like buyout bargains."

8 global giants to watch.

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