Retail Buyout Targets Public Markets Return

The $1.3 billion buyout of Linens n Things by Apollo Management, National Realty & Development and Silver Point Capital is based on the expectation the incoming ceo, Robert DiNicola, will be able to turn the company into a cash-flow positive company within three years. The acquirers will then sell off a stake in an IPO, according to Christopher Kresco, an analyst at KDP Investment Advisors. DiNicola, who led turnarounds at Zales and GNC, will shoot for sales per square foot, a measure of efficiency, to $185. In the 12 months ending Oct. 31, the store generated sales per square foot of $150.

Apollo and the other firms put up $649 million in equity, a sizable portion for an LBO. Last week, they marketed $650 million in floating senior secured notes due 2014 (B/B3). The bonds are callable at $102 after two years. Kresco said he didn't think many high-yield investors would jump at that. Most high-yield investors think interest rates won't rise anymore. "The upside is capped," he said. "If they're able to turn the company around where do the bonds go?"