Has the Pending Nordstrom Family Buyout Turned Personal Rather Than Financial?

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Some skeptical and cynical investors might think that founders and their families get to do whatever they want inside a company. It turns out that founders themselves, at least if they keep majority control, get a lot of freedom to run a company how they see fit. Their descendants, not so much.

The ongoing, or on-again off-gain, case of a founding family’s quest to take Nordstrom Inc. (NYSE: JWN) private again is becoming rather peculiar. The founding family of the higher end mall-based department stores was reported as wanting to take the company private last June.

When that was announced, Co-presidents Blake W. Nordstrom, Peter E. Nordstrom and Erik B. Nordstrom; President of Stores James F. Nordstrom; Chairman Emeritus Bruce A. Nordstrom; and Anne E. Gittinger had come together to explore the possibility of pursuing a “going private transaction.”  That’s code for a founding family-led buyout.

And in October of 2017 it was reported that the family notified the board of directors that they were suspending their efforts to take Nordstrom private after news that financing was becoming an issue.

Jump forward to March of 2018, and now Nordstrom’s special committee to evaluate offers already has rejected the founding family’s indicative offer to purchase all the outstanding shares of Nordstrom’s common stock not already owned by the group, including approximately 21% of the shares owned by the Nordstrom family members in the group, for $50 per share in cash.

The big question here now is what Nordstrom is really worth on its own as a standalone business. It also might make some investors wonder if the independent people evaluating Nordstrom’s worth have a problem with the family members of this buyout group itself.

When word of the “go-private” deal broke last June, Nordstrom shares immediately jumped up 16% to $47.00, and at that time it had a consensus analyst price target of $47.35 and a 52-week trading range of $35.01 to $62.82. It turns out that things really are not all that different for Nordstrom shares when you jump forward to the present day:

  • The stock was last seen down 1.5% at $51.13 and had previously closed at $51.90.
  • Its current consensus analyst target price from Thomson Reuters was $51.88.
  • Its 52-week range is now $37.79 to $54.00.

A look at Wall Street research reports and at history shows that Nordstrom traded as high as $80 back in early 2015. That was before the Amazon death star and other omnichannel pressures put any retailer with physical locations at risk. But if you look at the retail landscape now, many of the retailers have come back much stronger than Nordstrom, now that it seems like Amazon and the threat of online competition can’t just obliterate every single brick-and-mortar retailer.

The consensus target price is very close to $52 on a mean basis and right at $52 on a median analyst target. If the family is only willing to offer $50 per share initially, there appears to be a serious disconnect between real value and perceived value.

Now consider the highest analyst target price on Wall Street is only $60. Sure, it’s higher than now, but it implies less than 20% upside. And that’s after tax reform has passed, with an effective tax rate of 38% last year looking to be far lower in 2018 and ahead. Thomson Reuters shows an effective tax rate projection of closer to 28% in the years ahead.

Jim Cramer on CNBC has telegraphed that it might take $56 a share to acquire Nordstrom.

On March 1, William Blair’s team noted that management sounded more confident that its margins can both stabilize and grow. They also noted that the potential buyout clouds the near-term share outlook, and that is why they had only a Market Perform rating. The team at Piper Jaffray recently reiterated its Neutral rating and $48 price target. But D.A. Davidson has raised Nordstrom’s price target to $58 from $53, and the firm has a Buy rating.

On top of the special committee reviewing the potential offer as inadequate, the press release said:

The Special Committee has directed its advisors and management not to provide further due diligence information to the Group. Furthermore, unless the Group can promptly and substantially improve the price it is proposing to pay for the Company, the Special Committee intends to terminate discussions.

The Special Committee is committed to protecting the interests of the Company and all of its shareholders. The Special Committee is being advised by Centerview Partners LLC as financial advisor and Sidley Austin LLP as legal counsel.

No assurances can be given regarding the terms and details of any transaction, that any proposal made by the Group will be accepted by the Special Committee, that definitive documentation relating to a transaction will be executed, or that a transaction will be consummated in accordance with that documentation, if at all. The Company undertakes no obligation to update or revise this press release to reflect subsequent events, new information or future circumstances, except as required by law.

If the company is unwilling to offer any further due diligence and is demanding a substantial and nearly immediate uptick on the $50 buyout price, this is a deal that may just never come to fruition. At $51.38 a share, Nordstrom has an $8.6 billion market cap, and it already carries an additional $2.7 billion in long-term debt without more post-buyout debt being piled on to pay for going private.

This Nordstrom buyout is one of those potential deals that just doesn’t look right. And it might even have become personal rather than about raw financial matters.

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