BARBARIANS AT THE MALL
Sep 1, 2006 12:00 PM, By Elaine Misonzhnik
Back in the 1980s, the private-equity players were leveraged buyout “raiders” like the oil patch's T. Boone Pickens and Henry Kravis, who engineered the $9.6 billion leveraged byout of RJR Nabisco, which was immortalized in the era-defining Barbarians at the Gate. In retail, real estate mogul Robert Campeau swooped down from Canada to acquire Federated Department Stores and Allied Stores. By 1989, he was unable to keep up with payments and lenders refused to refinance his $11 billion debt. In January 1990, he put Federated into bankruptcy — the event that is credited with ending the 1980s LBO era. When the dust cleared, venerable chains such as Abraham & Straus, B. Altman, Bonwit Teller, Bamberger's, Davison's, Gemco and Ohrbach's were gone.
What's different now? For one thing, today's buyers have been more careful about leverage, says Todd Hooper, a strategist with global consulting firm Kurt Salmon Associates, which has represented buyers on several retail acquisitions. Hooper says that his clients are putting up 30 percent to 45 percent of the total transaction cost, compared with the 10 percent or 15 percent that LBO raiders put up two decades ago.
Another important factor is the low valuations of retailers, says Craig Johnson, president of New Canaan, Conn.-based research firm Customer Growth Partners. Chains like Gap, The Borders Group, Pier 1 and teen apparel seller Hot Topic trade at price-per-earnings ratios of between $13 and $16 per share. Gap shares have tumbled from $34.91 at the beginning of April to $23 in mid-August. Pier 1's share prices have fallen by half, from $12.58 on April 6 to $6.10 in late August.
“We think because the street in general thinks that the consumer is going to tank, retail valuation is down,” Johnson says. “And smart money, like Texas Pacific Group, Bain Capital and Warburg Pincus, are thinking that this is a great opportunity to buy something at very favorable valuation.”
Retail is only one of several tempting targets for these investors, who have raised hundreds of billions of dollars and are scouring the globe for deals. The biggest deal since the barbarians' era is now in the works — a $33 billion buyout of hospital giant HCA by a group of private-equity firms including Kohlberg Kravis & Roberts. Bank of America predicts that the volume of corporate buyouts is expected to exceed $1 trillion in 2006.
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