February 11, 2015
Equity firm has sights set on Chico’s FAS
Sycamore Partners, a New York-based private equity firm, is in talks to buy Chico’s FAS, a company that operates more than 1,500 stores in the U.S. and Canada under the Chico’s, Boston Proper, Soma and White House Black Market banners, according to reports. The deal to acquire the publicly traded Chico’s would be in the range of $3 billion.
For Sycamore, the deal with the Chico’s FAS represents its second recent attempt to engineer a leveraged buyout of a fashion retailer. According to The Wall Street Journal, talks to acquire Express were called off by the retailer after months of talks because Sycamore was unable to secure the financing necessary to make the deal happen.
At this point, Chico’s FAS appears committed to the deal if the equity firm is able to secure financing. That may be easier said than done, however, as Reuters reports banks are "reluctant to meet Sycamore’s demands for a lot of debt to increase returns on the deal."
While leveraged buyouts the size proposed by Sycamore for Chico’s are not common, they are not totally unheard of either. A group of investors led by BC Partners agreed to acquire PetSmart for $8.2 billion in December.
Sycamore, which opened in 2011, according to The New York Times, focuses primarily on acquiring smaller chains. If the firm were to acquire Chico’s FAS, it would add the company to a portfolio that includes Aéropostale, Anne Klein, Easy Spirit, Nine West, Stuart Weitzman and Talbots.
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How will a leveraged buyout of Chico’s FAS affect the retailer’s businesses? Are retailers acquired in LBOs typically stronger or weaker as a result?
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Sycamore has already assembled a collection of mall-based specialty apparel chains. (The article mentions Aeropostale and Talbots, but there are also investments in Hot Topic and the Coldwater Creek brand assets.) These are not the strongest brands in the business, and even Chico’s is struggling right now. Either Sycamore believes in the segment, or they bought the brands at a sufficient discount to make some money on a future sale.
Going private can be liberating for a company no longer under the microscope for its quarterly results, but the question in Chico’s case is whether Sycamore is already highly leveraged and how it will affect the company’s operations. It would make sense for Sycamore to find some back-office economies among all the brands and chains it now operates.
I would suspect Sycamore has ideas about how to make Chico’s a more valuable company and they seem highly focused on apparel retail given their stable of companies.
The question I would ask is why wasn’t Sycamore able to close the deal with Express as the reason mentioned above, unable to secure the necessary financing, would seem to impact the Chico’s deal as well.
My concern would be centered on Sycamore’s inability to close the Express buyout. What has changed that makes the Chico’s deal doable?
Bankers aren’t retailers—as we’ve painfully learned, even many retailers aren’t really retailers—so unless there’s some compelling reason for the LBO (jettisoning an incompetent management, synergy with other companies the buyer owns) what they’re going to bring in are a short-term focus and a lot of debt…hardly a recipe for success in the long haul.
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Sycamore has already assembled a collection of mall-based specialty apparel chains. (The article mentions Aeropostale and Talbots, but there are also investments in Hot Topic and the Coldwater Creek brand assets.) These are not the strongest brands in the business, and even Chico’s is struggling right now. Either Sycamore believes in the segment, or they bought the brands at a sufficient discount to make some money on a future sale.
Going private can be liberating for a company no longer under the microscope for its quarterly results, but the question in Chico’s case is whether Sycamore is already highly leveraged and how it will affect the company’s operations. It would make sense for Sycamore to find some back-office economies among all the brands and chains it now operates.
I would suspect Sycamore has ideas about how to make Chico’s a more valuable company and they seem highly focused on apparel retail given their stable of companies.
The question I would ask is why wasn’t Sycamore able to close the deal with Express as the reason mentioned above, unable to secure the necessary financing, would seem to impact the Chico’s deal as well.
My concern would be centered on Sycamore’s inability to close the Express buyout. What has changed that makes the Chico’s deal doable?
Bankers aren’t retailers—as we’ve painfully learned, even many retailers aren’t really retailers—so unless there’s some compelling reason for the LBO (jettisoning an incompetent management, synergy with other companies the buyer owns) what they’re going to bring in are a short-term focus and a lot of debt…hardly a recipe for success in the long haul.