TPG, Warburg Shelve Neiman IPO Plans; Sell Company For 16% IRR

Today we got yet another indication that the smartest money was not lying when it said to "sell now" and is eyeing the rapidly shutting window on public equity investment exits, when news broke that TPG and Warburg Pincus, the firms who LBOed Neiman Marcus in October 2005, have decided to pull the luxury retailer's IPO filed in June, and instead will sell the company in yet another LBO, this time to Ares and the Canadian Pension Plan Investment Board. This is a hit to Neiman's proposed valuation: according to JBN it had been reported that the equity funds could price, or rather thought they could price, the retailer at $8 billion. Instead they will opt for a cash check of $6 billion, or a solid 25% reduction in expected return. Still don't cry for the PE giants: as the back of the envelope analysis below shows, net of the sponsor equity investment of $1.2 billion, and adding the $435 million dividend from March 2012, assuming the return to sponsors is $3.4 billion ($6 billion price less $2.6 billion in net debt), the generated XIRR over the 8 years holding is a decent 15.6% XIRR.

Obviously generating an IRR just over 15% is not bad for an investment which over five years barely grew adjusted EBITDA from $510MM to $623MM, and survived the second great depression, even if the target market was the ultra luxury retail consumer who courtesy of the "wealth effect" has been impacted far less than the balance of the retail space.

The investment analysis from Ares'/Canada's perspective is far murkier.

It is obvious that the two firms are rushing to fund a deal with as much debt as possible while rates are still relatively low. Assuming a 6x EBITDA debt multiple for the re-LBO (the pro forma capital structure is still unknown), the acquisition will require a solid $1.6 billion equity check for the 10x EV/EBITDA transaction. Assuming a 5 year holding period, suggesting that to hit the 20% return bogey, the equity return will need to grow to $4 billion by 2018.

This in turn implies that either the transaction exit multiple in 5 years will have to be over 13x, or somehow Neiman Marcus will need to grow its LTM EBITDA by 30% from $0.6 billion to $0.8 billion over the same time period.

Good luck.