Winning some, losing others

As some of Sun Capital’s recent battles show, the retail market is getting increasingly competitive as firms jockey for deals. By Aaron Lovell.

Private equity is, by nature, fiercely competitive. And in the retail sector, an area that seems to be heating up recently, the competition is getting downright cutthroat.

Last spring, for example, Minneapolis-based LBO shop Goldner Hawn Johnson & Morrison made an offer for Green Bay, Wisconsin-based Shopko, a discount retail chain serving the South and Midwestern US. In April, the store signed a definitive merger agreement, planning to sell the company to Goldner affiliate Badger Retail for around $24 a share.

But several months – and four deal amendments – later, Sun Capital Partners, a Boca Raton, Florida-based turnaround shop, was able to take the deal down, offering $29 per share. The offer, tendered in October, represents a 20 percent premium over the original bid.  

Shopko terminated the initial deal with Goldner and Badger Retail, paying the firm a $13.5 million break-up fee. The retailer cited Sun Capital’s financial resources, its retailing background and the firm’s “experience in successfully completing transactions of this type” as the reasons behind the decision – in addition to the higher purchase price. 
 
Sun Capital will be using its new Sun Capital Partners IV fund, a $1.5 billion vehicle the firm closed this summer, for the Shopko transaction. Part of the enthusiasm for the fund came from Sun’s past experience in the retail sector, where it has made bets on chain stores like Best Buy record store cast-off Musicland Group and former Target subsidiary Mervyn’s, a department store, in a group deal with New York-based hedge fund Cerberus Capital Management and real estate fund Lubert-Adler/Klaff Partners.

And Sun hopes to do more retail investing. But on the heels of the Shopko deal, Sun was near closing on Goody’s Family Clothing, a Knoxville, Tennessee mid-priced clothing retailer with 368 stores in 20 states. On October 10, the firm offered the chain $8 per NASDAQ-listed share, a $264 million transaction.

Then, earlier this week, two additional investor groups, one unnamed and one consisting of Prentice Capital Management and GMM Capital, weighed in with competing bids. The highest offer upped the stakes to $8.85 per share, or $291 million, for the takeover.

In a statement released Monday, Goody’s confirmed the rival bid and said the retail chain would terminate the initial agreement at the end of the day Thursday, if no further deal had been reached with Sun. The company said it was also continuing to talk with the unnamed third bidder.      

Earlier this month, private equity firms Texas Pacific Group and Warburg Pincus closed their purchase of The Neiman Marcus Group, finalising the $5.1 billion (€4.18 billion) deal that valued the publicly held department store chain at $100 a share.

While not a turnaround deal, the high-profile LBO – along with the $6 billion Toys ‘R’ Us buyout by Kohlberg Kravis Roberts, Bain Capital and Vornado Realty Trust and the JW Childs LBO of Brookstone – illustrates the level of interest in the retail sector from private equity money.

And with so many deals and so many players looking to invest in these retailers, there is little wonder why smaller, distressed chains are garnering lots of attention from cash-flushed fund sponsors.