Taking J.C. Penney Private
February 15, 2013 by Douglas A. McIntyre
Like Dell Inc. (NASDAQ: DELL) or Best Buy Co. Inc. (NYSE: BBY), the odds of a substantial improvement in J.C. Penney’s fortunes are close to nil. But it would not face a precipitous drop in share price because of quarter-to-quarter performance and month-to-month same-store sales, should it be owned by a few huge investors. Going private may be J.C. Penney’s only chance to dodge the effects of its falling share price.
J.C. Penney already has a few of the necessary pieces in place to go private. The first is that it has several deep-pocket shareholders, each of which for some reason believes that the troubled retailer has a chance at a better future. First among these is usually savvy William Ackman of Pershing Square. Another is Vornado Realty Trust (NYSE: VNO), as well as financial firms State Street Corp. (NYSE: STT) and Evercore Partners Inc. (NYSE: EVR). Among them, these investors hold a third or more of J.C. Penney’s shares, based on the retailer’s most recent proxy.
Ackman would need to lead any J.C. Penney LBO, both because of his position in the company’s stock and his membership on its board. Steven Roth of Vornado is also a board member. Ackman might make the argument, at least to himself, that J.C. Penney’s shares are cheap, having fallen by more than 50% in the past year.
Although J.C. Penney’s revenue drop has run more than 20% for three quarters, the company loses very little money. On revenue of $3 billion in its most recent quarter, the company lost $123 million. J.C. Penney has $2.9 billion in long-term debt, which is probably manageable in a low interest rate environment. That is particularly so if a restructuring of the retailer and sharp expense cuts are even moderately successful.
J.C. Penney likely would need to close scores of its least successful stores. It would hardly be the first retailer that took such an action in an attempt to improve margins. A lower store count could buy J.C. Penney a great deal of time to find a successful merchandising strategy.
If Ackman and his fellow large investors still believe in J.C. Penney, now is the time to take it private — before things get better, if they can, and the share price rises.
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