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Who Wants To Buy a Retailer?

Warren ShoulbergWarren Shoulberg
Apparently Just About Everybody.
     If you've been following the funny papers - formerly known as the financial section of the news - you may have noticed a recent rather unusual spike in the amount of activity surrounding the subject of retail acquisitions.
     A pair of money-slinging private equity bloodsuckers have bought a big stake in JC Penney. J. Crew is going private via another private buy-out. And last week Family Dollar rebuffed yet another bunch of money guys, who had put up an unsolicited offer for the company. What exactly is going on here?
     Don't these guys know that retail is a dying industry, that the Internet is going to replace real stores and that all those Gen Xers and Millenniums and whoever else is being gestated out there has no interest in bucking the traffic, schlepping to the mall, trying to find a parking spot and standing in line at a cash register with a fist full of paper coupons?
     Don't they know that there's no longer any truth to the old ruse about buying retailers because you could then unlock the hidden value of the real estate, closing down some underperforming units and flipping the leases to the latest up-and-coming expanding chain?
     Don't they know that America is over-stored, that retailing is a lousy business run by lousy businessmen who don't know the difference between a balance sheet and a fitted sheet and couldn't find a pen with black ink if they were signing the Declaration of Independence? What's the matter with these guys, anyway?
     Well, the simple answer is that the money guys, having run out of interesting banks, airlines, pharmaceutical companies and REITS to exploit, are always on the lookout for new places to park their cash and retailers are an untapped resource.
     The less-simple answer is that retailing remains a viable business where you can make a lot of money if you know what you're doing.

     Of course, it's not that simple. Pershing Square and Vornado, the two private equity monsters that have taken a big bite out of Penney, largely see a company that they can suck more profits out of, rather than a perfectly run cash cow that will spin off dividends from now through the next sighting of Haley's Comet.
     Not that either has a perfect track record. Vornado was created on the bone yard of the old Two Guys from Harrison discount store and later ran Alexander's, another late, largely unlamented mass operation in the Northeast.
     Pershing Square took on a chunk of Target and tried, unsuccessfully, to have its way with them. Its other recent retail play has been Borders, and we know where that's going.

     But J. Crew and Family Dollar are both - excuse the expression - top dollar operations that are highly coveted, and that's what's really going on here. Investors are willing to put up big money if they believe a retail operation is well-run, has a clearly identifiable market position and executes it strategy successfully.
     Just like any business.
    Retailing is still a fragmented business when you consider general merchandise retailing as the universe, not just mass merchants or department stores. There may be only three national discount stores and a couple of department stores, but lump all retailing into a bucket and you have ten or 12 big players. Compare that to three or four banks, a few airlines, a couple of supermarket chains. There's still a lot of upside investment potential in a business that is not going away.
     Who wants to buy a retailer? Somebody smart.

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