If Sycamore Partners acquires Charlotte-based Belk, it would not only be the largest deal for the New York private equity firm, it would be a new kind of acquisition for the company.
Sycamore has a portfolio consisting mostly of investments in specialty apparel companies including Aéropostale, Coldwater Creek, Hot Topic, Jones New York, Nine West Holdings and Talbots. Belk, with $4.11 billion in revenue in 2014, would be its first department store acquisition.
A source told the Observer last week that Sycamore is finalizing an offer of up to $3.5 billion for Belk. Bids for the department store chain are due on Friday, setting up a decision by the Belk family on whether to sell. It’s not clear if other bidders will emerge.
A Belk spokeswoman declined to comment.
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A Belk acquisition would be Sycamore’s second deal this year involving a Charlotte-area company. In May, Sycamore agreed to buy 330 Family Dollar stores from Dollar Tree, which has acquired Matthews-based Family Dollar. Discount stores are also a new kind of investment for Sycamore.
Mike Paglia, a Kantar Retail analyst who covers discount chains, said investing in department stores and discount stores could simply be a way Sycamore is diversifying to maximize returns.
“It’s very similar to what you or I would do with a retirement investment portfolio, where different assets have different roles and expectations,” Paglia said.
Sycamore, which has more than $3.5 billion in capital under management, was started in 2011 by Stefan Kaluzny and Peter Morrow, two former executives from San Francisco-based buyout firm Golden Gate Capital. Sycamore, which did not comment for this story, occupies space in a building overlooking Central Park that’s also home to other big-name private equity firms including Apollo Global Management and Silver Lake Partners.
Dollar store deal
Sycamore has said it will operate the 330 divested Family Dollar stores under a brand called Dollar Express but has offered no other details.
Two Charlotte Family Dollar stores will be sold to the private equity firm as part of Dollar Tree’s agreement with federal regulators. One is at 1437 E. Sugar Creek Road, near the Eastway Drive intersection. The other is at 5300 South Blvd., near Tyvola Road.
Discount stores – if that is how Sycamore decides to maintain Dollar Express stores – represent “one of the fastest-growing brick-and-mortar channels of trade out there,” Paglia said, so that acquisition could prove lucrative for the firm.
“We have a proven track record of retail success and an experienced leadership team,” Morrow, a managing director at Sycamore Partners, said in a statement when Dollar Tree announced the Family Dollar store divestitures.
Through a spokesman, Sycamore said it wouldn’t discuss its plans for the stores until the acquisition closes “a bit later this year.”
As for Belk, the retailer is expected to make a decision about whether to sell the company this month, though it’s still not certain whether a deal will go through given the valuation, said the source who spoke with the Observer.
The family-owned chain has been beset with challenges from the growing e-commerce industry and competition in the saturated department-store market, but Sycamore might still see it as an opportunity.
“Belk has a place in people’s hearts and memories,” said Marie Driscoll, CEO and chief consultant at Driscoll Advisors, a retail industry consulting firm. “You can benefit from regional loyalties.”
2 deals abandoned
Private equity companies generally fund big purchases in part with their own money but mostly with bank loans.
Earlier this year, Sycamore Partners abandoned its plans to buy Express and later Chico’s after failing to line up funding for both.
In a statement in late January, Express said the deal had been terminated “due to the unavailability of financing on commercially acceptable terms.”
In March 2013, federal bank regulators issued guidance that urged banks to tighten their underwriting standards for so-called leveraged loans used in private equity buyouts and to improve their risk management policies. Regulators have also been more closely monitoring banks’ loan portfolios.
A source familiar with the deals said it is because of these tighter lending standards that private equity firms such as Sycamore have had a harder time securing funding.
“With these two deals not working out as planned, (Kaluzny) has to find a new way to invest money. You can’t be who he is, you can’t do what he does and not invest,” said the person, who didn’t want to be named to protect business relationships.
When it does close a deal, Sycamore Partners doesn’t have a specific formula it uses to make a business profitable again, such as store closures or layoffs, the person said.
One way it cuts costs, though, is by sourcing its Asian-made products through a third-party company called Mast Global it bought from Limited Brands in 2011.
Mast Global is “a lucrative business for (Kaluzny), and the more he can leverage, the more money he makes,” the person said. Staff writer Rick Rothacker contributed.