BARBARIANS AT THE MALL
Sep 1, 2006 12:00 PM, By Elaine Misonzhnik
A few years ago, Stanley Eichelbaum began experiencing a major case of déjà vu. Eichelbaum, president of Cincinnati-based property consulting firm Marketing Developments, Inc., watched uneasily as private-equity investors began to swarm over the retail business. To him, it looked a lot like the leveraged-buyout boom of the 1980s, which left a trail of bankruptcies and empty stores.
“We issue a regular list of concerns to clients and for the last three years, on top of that list has been the issue of non-retail control of retailers and the havoc that has created in the past,” Eichelbaum says.
Lately, however, he has taken a less alarmist view. Even as the pots of private equity swell and investors are rumored to be circling such retail icons as Gap Inc. and Pier 1 Imports, Eichelbaum, has come to view these investors as badly needed change agents.
“In the past, a buyout meant the retailer was headed for extinction,” Eichelbaum says. “But we have changed our perspective. This group of investors seems intent on rebuilding the industry in a way that retailers were not willing to do for decades.”
It's easy to understand why Eichelbaum was alarmed. Since January 2005, there have been 94 deals in which private-equity partnerships bought retail chains. The total value is $54.8 billion, according to Dealogic, and includes such icons as Lord & Taylor, which was sold by Federated Department Stores to a partnership of National Realty & Development Corp. and Apollo Real Estate Advisors for $1.2 billion. Bain Capital and the Blackstone Group are waiting to finalize their $6 billion purchase of arts and crafts seller Michaels Stores, Inc. Meanwhile, for the second time in the past six years Texas Pacific Group and Leonard Green & Partners are buying PETCO — this time for $1.8 billion.
But, Eichelbaum says, in these transactions he no longer sees the pattern of the 1980s, when financial buyers took over retail companies, leveraged them up and then failed when they could not create sufficient cash flow through assets sales and cost cuts. For the most part, the current buyout firms have shown both an interest in retail operations and seem intent on improving business performance. For example, Mervyns, which seemed slated for extinction, has thrived under its new owners.
