Nordstrom: Sell Due To Limited Upside

seekingalpha11-19

Nordstrom, Inc. received a $23 per share takeover bid from the Nordstrom family and Mexican retailer El Puerto de Liverpool.The proposed takeover price values JWN at a premium compared to peers like ...

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PaulMcKinnon  Shares of Nordstrom, Inc. (NYSE:JWN) have been trading in a fairly narrow range following news in early September that the company had received a takeover from the Nordstrom family for $23 per share in cash. While the prospect of a higher bid cannot be ruled out, I believe a significantly higher bid from the current price is unlikely. On the other hand, while I expect the deal to ultimately be approved, there is some chance that the deal falls apart, resulting in a significant drop in the stock. For these reasons, I do not believe JWN is an attractive investment at current levels. Nordstrom Family Bid On September 4, 2024, JWN announced that it had received a takeover offer for the company for $23 per share in cash. The \"Buyer Group\" is led by Erik and Pete Nordstrom (CEO and President of the company respectively), but also includes other family members as well as Mexican retailer El Puerto de Liverpool. The Nordstrom family controls about 33.4% of the company's shares outstanding, while El Puerto de Liverpool owns nearly 10% of the company's outstanding shares. Thus, given the obvious conflicts of interest, the company has created a special committee comprised of independent and disinterested directors to review the transaction and determine the best course of action for all shareholders. It must be noted that this is not the first time that the family has attempted to acquire its namesake company. In 2018, the family attempted to acquire the company for $50 per share, but the deal was rejected as the company determined the price was too low. While the bid did not represent a significant premium to where the stock was trading just prior to the announcement, it does represent a significant premium of roughly 35% to where the stock had been trading prior to initial media reports on March 18, 2024 that the family was exploring a bid for the company. Financing for the proposed transaction includes the existing stake in the company owned by the Buyer Group, new additional cash contributions from the buyer group, cash currently on the company's balance sheet, as well as $250 million of bank financing. Data by YCharts Proposed Takeover Price Is Reasonable Based on the proposed takeover price of $23 per share, the transaction values JWN at roughly 12x FY 2024 EPS, a forward EV/EBITDA multiple of 5x, and an EV/Revenue multiple of 0.38x. As shown by the charts below, based on all of the above valuation metrics, the transaction values JWN shares at a significant premium to peers such as Macy's (M) and Kohl's (KSS). Macy's trades at a forward P/E ratio of 5.7x, while Kohl's trades at a forward P/E ratio of 9.8x. Moreover, it should also be noted that these three companies all have similar near-term earnings growth prospects. Currently, consensus estimates call for JWN to report EPS growth of 6% and 5% respectively for 2025 and 2026. Kohl's is expected to report EPS growth of 8% and 3% respectively for 2025 and 2026 while Macy's is expected to report a modest EPS decline of 5.5% in 2025 and EPS growth of 2% in 2026. Given the similar near-term growth prospects of these companies, I do not believe JWN is worth a substantial premium. Wall Street analysts also appear to view the proposed takeover valuation as reasonable. Currently, the stock has 13 Hold ratings, 1 Buy rating, 2 Strong Buy ratings, 2 Sell ratings, and 1 Strong Sell rating. Based on this ratings distribution, it is clear that Wall Street analysts do not view the stock as undervalued at current levels, which is in line with the proposed takeover bid. Data by YCharts Data by YCharts Data by YChartsSeeking Alpha Competing Bids Are Unlikely One potential catalyst for upside in JWN shares from current levels would be the emergence of a competing bid from another player. However, I view the emergence of such a bid as unlikely for a number of reasons. Firstly, no competing bid has emerged in the roughly 2 months since the Nordstrom family proposal was made public. Moreover, there have not been any rumors of alternative parties having interest in the company. One reason for this is the fact that the Nordstrom family and El Puerto de Liverpool together control roughly 43% of shares outstanding, which would make it very difficult for an alternative proposal to be approved by shareholders. Perhaps the parties most likely to launch a competing bid would be another department store operator. A merger with another department store operator could allow for significant cost synergies and increased bargaining power with suppliers due to increased scale. However, I view such a transaction as highly unlikely because the two most likely strategic buyers, Saks Fifth Avenue parent HBC and Macy's, currently have their focus elsewhere. In July 2024, HBC announced a $2.65 billion deal to acquire Neiman Marcus, while Macy's recently rejected a buyout proposal from an investor group and is focused on plans to close 150 of its stores in the coming years to improve profitability. I view a private equity backed bid as fairly unlikely as well, given the high cyclicality of the retail business and mixed track record of retail leveraged buyouts. Potential Downside If The Deal Falls Apart While I believe it is highly unlikely that the current bid falls apart, it is certainly possible. The most likely reason why the bid falls apart is that shareholders decide not to approve the transaction. Approval of the currently proposed transaction requires a two-thirds shareholder vote (including shares held by the buyer group) and a majority vote by the shareholders who are not part of the buyer group. Given the large block of shares controlled by the Buyer Group (~43% of shares outstanding), the more difficult threshold is the majority of the shareholders who are not part of the buyer group. Shareholders could decide to reject the transaction if they believe the company is worth more than the $23 per share currently offered. Additionally, the special committee of the JWN Board could also decide to reject the offer as inadequate. Another way the deal could fall apart is if the Buyer Group decides to walk away from the transaction, as the deal is non-binding. Perhaps the most likely reason why the buyer group would walk away from the transaction is if business conditions were to worsen significantly. While this seems unlikely given the relatively strong economic conditions, it is a risk that any JWN investors must be aware of. Additionally, the Buyer Group may be unable to secure the additional capital required to complete the transaction, including over $800 million in new equity. If the deal were to collapse, then I would expect JWN shares to have significant downside from current levels. It is not unreasonable to expect that shares could give back much of the 35% gain that occurred after initial talk of the transaction was reported in mid-March. However, shares could fall less or more than this amount based on how the company's underlying business performs. For example, if the business were to perform significantly worse than expected, resulting in the Buyer Group deciding to pull their bid it is not unreasonable to assume the stock could fall by even more than 35% from current levels. Data by YCharts A Higher Bid Is A Potential Upside Catalyst The most likely upside catalyst for JWN shares from current levels would be if the Buyer Group decides to increase their offer from the currently proposed $23 per share in cash. The most likely reason why this would occur would be if the special committee decides the current transaction is not in the best interest of all shareholders, or if the Buyer Group believes that the current offer does not have majority support from shareholders who are not part of the Buyer Group. While an increased bid is certainly possible, I view such a scenario as relatively unlikely given the lack of competitive tension in the process due to the lack of a second bidder at this stage. It should also be noted that JWN shareholders and the special committee cannot be sure that the Buyer Group would increase its bid if the current offer were to be rejected. The roughly 13% decline that Macy's shares experienced after its board rejected a $24 per share takeover bid offer an important lesson as to the potential pitfalls of rejecting a bid in hopes of securing a better offer. Macy's shares have continued to fall and are now trading at 35% discount to the $24 per share offer which was on the table. If an increased bid were to occur, I believe any increased premium would be small relative to the current offer and could be in a $1- $2 range per share, which could allow existing shareholders to realize only modest additional gains from current levels. Conclusion JWN shares are currently trading very close to the $23 per share, non-binding takeover offer made by a Buyer Group consisting of members of the Nordstrom family and El Puerto de Liverpool. In my view, the deal represents a reasonable premium relative to peers and the company's own stock price prior to initial reports of a potential deal. If the deal is completed based on the current offer price, shareholders have limited upside which comes primarily through the receipt of quarterly dividends between now and the closing of the transaction. The most likely source of upside from current levels is if the Buyer Group were to modestly increase its offer above the current offer of $23 per share. However, I view this as somewhat unlikely given a lack of competitive tension in the process. Thus, at best, I see only modest upside for the stock from current levels. On the other hand, if the deal were to fall apart for any reason, then I believe JWN shares could trade sharply lower from current levels. While the deal is likely to close, the non-binding nature of the proposal has created some uncertainty.  For these reasons, I do not believe the stock is a compelling investment at current levels.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484968125"}