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The bankruptcy of Saks Global again brought out charges that, similar to other retail collapses, burdensome debt built up under private equity ownership was to blame.
The poster child of private equity disrupting retail is Toys ‘R’ Us, which underwent a leveraged buyout (LBO) in 2005 -- led by private equity firms KKR, Bain Capital, and Vornado Realty Trust -- only to file for bankruptcy in 2017 and close its U.S. stores in 2018. Critics have argued the LBO saddled Toys 'R' Us with over $5 billion in debt that diverted funds from modernization to better compete -- while private equity owners benefited be extracting fees, selling off real estate and interest payments.
KKR said in a statement at the time that it lost "many millions of dollars" on its Toys “R” Us’ investment, and blamed the chain's troubles on market forces, specifically the growth of e-commerce retailers.
Other chains that were forced into bankruptcy after taking on debt in leveraged buyouts include Hudson’s Bay, Sears, Kmart, Sports Authority, RadioShack, Barneys, Gymboree, Joann Fabrics, and Payless ShoeSource.
Private Equity Versus Retail Excellence: At Odds, or No?
The culprit identified by many in the Saks’ bankruptcy case is Richard Baker, a real estate developer and founder of private equity firm NRDC Equity Partners. Baker’s past deals in the retail space had already given him a poor record for turnarounds.
As The Wall Street Journal explained, Baker created NRDC “to snap up retailers with valuable real estate. A memo he wrote that year listed his targets: Lord & Taylor, Canadian chain Hudson’s Bay, Saks, Germany’s Galeria Kaufhof, and Neiman Marcus. He would go on to buy them all. Each eventually filed for bankruptcy—though not all on his watch. Even though the companies failed, Baker often made money on the real estate.”
The merger of Saks and Neiman Marcus was designed to reduce costs, add leverage over brands, and provide shoppers a better experience through shared inventory and loyalty programs. However, the $2.2 billion of debt absorbed to fund its acquisition raised concerns, considering Saks was already losing money amid a global luxury sector slowdown.
"The deal was built on aggressive earnings and cost-cut assumptions that have not been achieved, while the added leverage has proven difficult to sustain in a structurally shrinking retail sector," Tim Hynes, global head of credit research at financial intelligence firm Debtwire, told Reuters.
The deal’s finances were “a recipe for disaster,” Mickey Chadha, VP of corporate finance at Moody’s Ratings, told The New York Times.
Phil Wahba, retail reporter for Fortune, believes the merger’s failure was undermined by many stores competing against each other -- as well as the leverage luxury brands have gained as they’ve opened stores. However, he likewise cited the debt taken on in the merger, which ultimately led to delayed payments to vendors and consequently to understocks in stores. Wahba wrote, “As often happens with private equity acquisitions of retailers, the companies were larded with unsustainable debt, which made investing in the core business more difficult and led to penny-pinching measures that have been destructive to the businesses.”
A Financial Times podcast, however, noted that while NRDC was a private equity firm, Saks was initially exploring a loan from private equity giant Apollo Global Management to fund the Neiman’s merger -- but turned to publicly held high-yield bonds. Eric Platt, the FT’s U.S. investment editor, said lessons from Saks' collapse should centered around the risks of excess debt.
Platt said on the podcast, “I would say that perhaps as a community, we need to stop thinking of like private versus public. It’s just credit markets and a lot of this used to be done by banks and a lot of it still is, but like, yeah. Are these investors who are writing big checks and big loans thoughtful enough in their due diligence or restrictive enough when they need to say no?”