Sun Capital Partners, a Florida-based investment firm, bought Musicland a year ago from Best Buy Co. The credit card receivables were sold to GE Consumer Finance for $475 million.
"It sounds like a fair price--the real estate is located well and in good condition, for the most part," says Mike Scott, a retail broker with United Properties, the Bloomington-based commercial real estate firm. By selling Mervyn's as an ongoing business, shopping malls won't have to deal with stores that have "gone dark" due to closing. Mervyn's 27,000 employees can keep working, and Target won't have to deal with multiple buyers or store closings, Scott adds. The deal, which requires regulatory approval, probably won't close until the third quarter.
"There's no question we wanted to sell Mervyn's as an ongoing business," says Target spokesman Carolyn Brookter. "That was one of our goals going in."
When Target put Mervyn's up for sale, retail real estate experts openly doubted the struggling Mervyn's chain could be sold as a continuing business. On a sf basis, the sale is considerably lower than the average retail center sold in the Twin Cities. Given that the Mervyn's stores encompass more than 20 million sf of space, the deal figures out to be about $100 per sf of space in total-—or, not including the credit card receivables, about $80 per sf. The average sales price of Twin Cities retail real estate in the first half of this year was $135 per sf, according to a recent report from United Properties.
Mervyn's, which has 27,000 employees, will operate as an independent retailer from its headquarters in Hayward, CA, says Michael Kalb, a principal of Sun Capital. The other partners in the deal are Cerberus Capital Management, a fund manager in New York, and Lubert-Adler and Klaff and Partners, a real estate investment firm in Philadelphia.
Kalb considers Mervyn's a profitable retail brand. "It's a profitable business, a strong company and a strong franchise," he says. His group plans to refurbish some of the Mervyn's stores and tinker with the retail strategy, but did not disclose details of those plans. In 2003, Mervyn's generated $3.6 billion in revenue and $160 million in pretax segment profit.
Earlier this year, Target sold its nine Twin Cities Mervyn's stores to May Department Stores as part of the $3.2-billion sale of Marshall Field's. Those stores are in the process of being closed, and May has not yet announced what it plans to do with the real estate.
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