Hudson’s Bay Co., owner of department store Saks Fifth Avenue, has entered into an agreement with a group of investors to be taken private. The move comes after the investment group, spearheaded by company Executive Chairman Richard Baker, upped its original offer.
The new bid values the troubled Canadian department store operator at $1.45 billion, Bloomberg reported. The deal is pending final approval of shareholders. A special meeting of shareholders is scheduled for December to vote on the proposal.
Baker’s group, which also includes WeWork Property Advisors and Rhone Capital LLS, offered to buy back the remaining 43 percent of company shares it doesn't already own for $10.30 Canadian dollars per share (or U.S. $7.86) in cash. That’s a 9 percent increase from the $9.45 Canadian dollars per share (or U.S. $7.21) the group offered in June.
In addition to Saks, the company owns Hudson’s Bay department store chain in Canada, Saks Off 5th, and the struggling Lord & Taylor, which it’s in the process of selling itself to clothing rental subscription service Le Tote Inc. for U.S. $75 million. According to a release, Hudson’s Bay will continue to retain ownership of all real estate related to Lord & Taylor.
For Hudson’s Bay, that deal will allow the company to keep its valuable real estate and eventually redevelop most Lord & Taylor boxes.
Hudson’s Bay also recently sold its European real estate and joint ventures to SIGNA Retail Holdings for $1.5 billion Canadian dollars (or U.S. $1.13 billion). Additionally, the company is closing its Home Outfitters chain in Canada and sold its value website Gilt. It now operates roughly 300 stores.
“One of the issues that Hudson’s Bay has is they have a lot of debt,” says Bruce Winder, co-founder and partner at the Retail Advisors Network in Toronto. “Their balance sheet is leveraged up with debt. They’ve already done a pretty good job of fixing or on the way to fixing it, as they’ve sold off a bunch of stuff.”
Bid offers ‘compelling value proposition’
Hudson’s Bay board said Baker’s new offer would give minority shareholders a “compelling value proposition in a deteriorating retail environment.”
Due to the retail sector’s continuing struggles, Hudson’s Bay said Baker’s new offer gives shareholders a “chance to cash in at a price the stock is unlikely to meet any time soon on its own,” Bloomberg reported.
“Despite the execution of several strategic initiatives, the company’s share price has continued to decline,” the company said in a statement. “The department store and specialty retail competitive landscape continues to evolve rapidly and the company will be required to invest substantial capital and resources to remain relevant to its customers and successfully compete.”
Will the offer satisfy everybody?
Not everyone is on board with the deal, as there were minority shareholders who opposed Baker’s original bid. The company needs a majority of shareholders to approve the proposal for it to be finalized.
“There are a couple of activist investors—one is Land & Buildings and the other Catalyst—who so far have signaled that [the offer is] still very low,” Winder notes. “So, it’s not necessarily a done deal by any means.”
“I would be very surprised if it passed at the current state of $10.30 a share. I think the two activist investors aren’t happy,” he adds. “They’re going to try and get a lot more than that.”
Reports are that shareholder Land & Buildings Investment Management, run by Jonathan Litt, still views the offer as undervaluing the company. Also, shareholder Catalyst Capital Group said Baker’s original offer undervalued the company’s real estate holdings.
Other industry watchers believe the deal will get done.
“I wouldn’t be surprised if this one gets accepted,” says Alex Arifuzzaman, founder/consultant at retail real estate adviser InterStratics Consultants Inc. in Toronto. He’s also an analytics instructor at the Schulich School of Business and the Ted Rogers School of Management in Toronto.
“I think that’s the maximum they’re willing to pay, and I think the shareholders realize it,” Arifuzzaman says. “I think the votes are close.”
How did they get here?
Like many retailers, Hudson’s Bay is flailing as it tries to adapt to changing consumer shopping habits and the escalation of online shopping and new competitors.
Historically, department and specialty store rules the retail sector, but now online is taking a bigger and bigger slice of sales, Arifuzzaman says. Hudson’s Bay has to figure out how it fits into this emerging online world. “Retailers have been evolving for generations,” he notes. “What [going private] does is give them more flexibility in terms of how they evolve.”
Going private will allow the company to make necessary changes, experts say. But they also point out that Hudson’s Bay real value may be in its real estate holdings.
“You have to ask: why are they going private?” Arifuzzaman says. “As a public company, they have to always meet their quarterly results. They have to divulge a lot of information about their strategy and it’s all in the public domain. If they go private, they go dark and they don’t have to do that.”
Another advantage is the company will have more freedom and flexibility to do things that it couldn’t do while remaining in the public markets, like looking at longer-term strategies.
The investment group could sell pieces of the company, restructure or pursue other strategies, Arifuzzaman notes.
“Baker has always made a lot of money by selling off pieces, especially real estate,” he notes. “Once they go private, anything could happen. What Baker wants to do is maximize the ROI.”
Hudson’s Bay isn’t the only department store retailer looking to go private. Members of the founding family of Nordstrom Inc. tried to take that company private last year. However, a special committee of the board rebuffed the buyout offer.
“I look at Nordstrom a lot, and I think that family would love to take that company private,” says Kim Forrest, chief compliance officer and founder of Bokeh Capital Partners in Pittsburgh. “They have some unusual ideas about how to change the experience of shopping, but they know the equity investor, the shareholder, isn’t necessarily happy to go along for the ride. And they don’t want to have to address that noise.”
“I think that by going private, Hudson’s Bay and all of their properties can have a little more flexibility that’s more imaginative both online and offline,” Forrest adds.
Close some stores; repurpose the real estate
North America, and especially the U.S., is overstored and that’s where most of Hudson’s Bay’s holdings are currently located, Forrest notes.
“I would say that just like Macy’s has to, Hudson’s Bay is going to have to shrink its footprint to make them viable. They have too many stores,” she notes. “I do think that people like to buy stuff; there’s just too much choice and not enough differentiation and too much physical store space.”
Hudson’s Bay will likely shutter locations, Winder agrees. “I think the Baker investment group is probably going to close a number of stores and repurpose the real estate,” Winder says. “Redevelop it or sell it, but really try to monetize the real estate for something other than department store retail.”
It’s no secret that the department store sector is suffering. “So, what they’re probably going to do is take the company private so they can monetize it and reap some pretty big rewards in terms of redeveloping the real estate for condominiums or other multi-purpose uses or lease some out to office-sharing entities or create mixed-use retail,” Winder says.
There’s going to be risk and costs around redevelopment, he notes. “But I would imagine that they’re sitting back and thinking, ‘Our company is undervalued in the markets because everyone beats up on department store stocks, so our real estate value is getting beaten up, dragged down along with everyone else.”
Hudson’s Bay banners is where investment is now focused
The company’s luxury retailer Saks has been called the company’s shining star.
“I think that’s a great brand,” Winder says. “Hudson’s Bay is a great brand and big up here in Canada, but they’re probably significantly overstored.”
There are 90 Hudson’s Bay stores and Winder says they may only need 20 or 30, so closing the rest and doing something else with that real estate makes sense.
And the stores themselves might be too big. The company could sublet some of the space or bring in other brands. He points to Nordstrom, which is partnering with direct-to-consumer brands. Or Hudson’s Bay could lease excess store space to office-sharing companies, for example.