Fitch Places Saks' on Rating Watch Negative

Mon Jul 29, 2013 5:11pm EDT

(The following statement was released by the rating agency) NEW YORK, July 29 (Fitch) Fitch Ratings has placed Saks Incorporated (Saks) on Rating Watch Negative. This action follows the company's announcement today that they have entered into a definitive merger agreement with Hudson's Bay Company (HBC). HBC will acquire Saks for US$16.00 per share in an all-cash transaction valued at approximately US$2.9 billion, including debt. This equates to approximately 11x of Saks' LTM EBITDA. The transaction is expected to close before the end of the calendar year, subject to approval by Saks shareholders, regulatory approvals and other customary closing conditions. HBC will operate three brands under Hudson's Bay, Lord & Taylor and Saks Fifth Avenue and post-transaction will have 320 stores in North America with pro forma sales of C$7.2 billion, normalized EBITDA of C$587 (or approximately US$570 million), and debt/EBITDA of 5.7x before realizing C$100 million in expected synergies. This contrasts to Neiman Marcus, Inc.'s revenue of $4.5 billion and EBITDA of $630 million. KEY RATING DRIVERS Fitch expects to withdraw Saks' ratings contingent upon the successful closing of the HBC transaction. Saks currently has a modest amount of on-balance sheet debt totaling $319 million, including $175 million drawn under its $600 million revolver, $91.2 million of 7.5% convertible notes due Dec. 1, 2013, and $51 million of capital leases. Fitch expects the 7.5% notes to be converted given that they are deep-in-the-money with a conversion price of $5.54 relative to the current stock price. The 7.5% notes include a change of control provision whereby there is a make whole premium although the adjustment results in relatively minor additional shares. Fitch's placement of Saks on Rating Watch Negative reflects the potential for an alternative bid given a 40-day go-shop period, including interest from private equity, which could lead to a leveraged transaction and have negative rating implications. RATING SENSITIVITIES In the event of an opposing bid that leads to a leveraged transaction, Fitch expects negative pressure on ratings and the IDR will be based on the post transaction capital structure. Fitch has placed the following ratings for Saks on Rating Watch Negative: --Long-term Issuer Default Rating 'BB'; --$600 million secured credit facility 'BBB-'; --Senior unsecured notes 'BB'. Contact: Primary Analyst Isabel Hu, CFA Associate Director +1-212-908-0672 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Monica Aggarwal, CFA Senior Director +1-212-908-0282 Committee Chairperson Jamie Rizzo Managing Director +1-212-908-0548 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Evaluating Corporate Governance' (Dec. 12, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology here Evaluating Corporate Governance here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.