Earlier today, the special committee of the Nordstrom board of directors ended discussions with the Nordstrom family about taking the company private. The special committee had already rejected the family’s offer as inadequate and gave every indication they were holding out for a better price. With no better offer forthcoming, they ended the potential sale process.
Why Nordstrom Would Go Private
Retail is in the throes of fundamental change and no one knows what the future of department stores will be. To figure that out, retailers are going to have to do massive experimentation. Public companies are not well-suited to that trial-and-error experimentation process because it makes earnings erratic and the market hates that. Private companies are much better positioned to make long-term investments; they can afford to have the patience to see what works and move on without recourse when something doesn’t pan out.
The Nordstrom family, wanting to ensure the survival of their family legacy company, sought to buy out the public shareholders. Unfortunately for that effort, they were unable to come to terms with the special committee of the board over what the value of the publicly-held shares should be.
The Nordstrom family knows they have to be careful about overpaying. As much as they might want to pay enough to motivate the committee to endorse a sale, the more they pay, the more they have to borrow. The more debt they take on, the more constrained the business will be to do the experimentation they need. There comes a point where the debt becomes so high that it impairs the ability of management to achieve their goal of building the company. Also, with too much debt, Nordstrom would be ill-prepared for a recession or if the business declines for any reason. If that were to happen, the business would be at risk and the family could lose control to its lenders and watch its investment turn to nothing. You can be sure it didn’t help that Toys R Us is liquidating; news like that makes lenders more cautious.
What Happens Now
Now that the special committee has ended the negotiation, you may be wondering what the rule book says about whether the process is over or not and whether Nordstrom can ever go private. The answer is: there is no rule book. Every negotiation is its own relationship and it can move in any direction. The odds are that the process has ended for now and Nordstrom will not be going private. But circumstances can change and while the most likely outcome is no going private deal this year, here are some scenarios that could change that:
- The economy turns downward and Nordstrom’s stock price declines. The special committee might reconsider their price and be willing to endorse a sale of the public shares for a lower price than they previously would look at.
- A third party emerges who wants to buy Nordstrom for a higher price than the family would pay. In that event, the family might reconsider paying more, or the family and the third party could join forces and buy it together. The odds are that if there’s someone else out there who would pay more they’d have already made themselves known. But you never know, anything can happen.
- The family decides they want to pay more for the business.
I believe most of these theoretical scenarios are not very likely, but they’re not outlandish. The desire to go private is there, the financing at a certain price is available, it only takes a change of motivation by one side or the other for the process to be rekindled.
This week the retail industry is gathered in Las Vegas for the Shoptalk conference. The talk at that conference is all about change and how to adapt to what consumers want now. At a time when retail is undergoing such enormous upheaval, it’s not shocking that a deal to take a major department store private would have many twists and turns. This is only one small bump on the road to where retail is headed.