(Bloomberg)—Hudson’s Bay Co. agreed to sell its iconic Lord & Taylor building in Manhattan and unloaded a minority stake to a private equity firm to help the struggling Canadian retailer cut debt and bolster its balance sheet.
Rhone Capital LLC will buy $500 million of convertible shares in Hudson’s Bay, and Rhone is teaming up with WeWork Cos. to buy the Lord & Taylor building on Fifth Avenue for $850 million. WeWork will also lease space within some Hudson’s Bay department stores, including its flagship Canadian outlet on Queen Street in Toronto.
The agreement brings some respite to the Toronto-based owner of Saks Fifth Avenue, which has been cutting thousands of jobs as it copes with an industry-wide slump for department stores. HBC has also come under pressure from activist investor Jonathan Litt of Land & Buildings Investment Management, who is urging the company to monetize some of its real estate holdings.
“The activist is just suggesting to us that we do what we’ve always done,” Hudson’s Bay Executive Chairman Richard Baker said in a phone interview Tuesday, adding the transaction started before Litt bought a stake.
The investments by New York-Based Rhone and WeWork, an office-sharing firm, will help Hudson’s Bay cut debt and boost cash by a combined C$1.6 billion ($1.27 billion), and may lead to additional real estate transactions, the company said. Baker said the deals will generate $385 million in cash and slash debt excluding mortgages to $500 million. That’s down from about $1.5 billion in current loans, according to data compiled by Bloomberg.
Hudson’s Bay soared on the announcement, rising as much as 8.7 percent to C$12.77. The stock was up 2 percent at 12:32 p.m. in Toronto. The stock has dropped 9 percent this year, and plunged by half in the past two years.
As part of the deal, Rhone will buy 50.9 million preferred shares at C$12.42 each that are convertible to common shares. The investment would give Rhone a 22 percent stake of HBC’s common shares upon conversion, making it one of the largest shareholders.
The transactions could make Hudson’s Bay “one of the strongest financial players in the department store space around the world,” Baker said. “That’s important as we go through a period of transition where some department stores are going to be winners and some aren’t.”
The Lord and Taylor building will continue to operate though the 2018 holiday season. It will then become WeWork’s New York headquarters and office space, while hosting a revamped store. HBC said it expected minimal impact on its earnings from the sale because the store is “many times less productive than the Saks Fifth Avenue flagship building.”
Baker said he sees opportunities to replicate the leasing agreement with WeWork in many locations. As retailers try to differentiate their offerings to compete with Amazon.com amid mall closures, the deal brings back millennials to brick-and-mortar stores -- if only to access their office.
“We will drive all of those millennial customers to all of our entrances through the middle of the store and create a tremendous amount of excitement and interest in our retail locations,” Baker said during a surprise appearance Tuesday at the WWD Summit, a retail conference in New York.
WeWork, which leases buildings and then rents out parcels of office space to entrepreneurs, teams and larger enterprises, raised more than $4 billion from SoftBank Group Corp. and its Vision Fund in August. The round, which valued the co-working company at about $20 billion, will allow WeWork to keep expanding into some of its newer markets in Asia and Latin America.
WeWork has been outgrowing its current New York headquarters in Chelsea, where many of its employees work. The company currently operates or is planning to open 237 office locations in 56 cities around the world.
The sale of the Lord & Taylor building comes just four days after Baker said he will take back the reins of the struggling department-store chain. The 51-year-old will become interim CEO on Nov. 1 as Jerry Storch steps down. The company has hired an executive-search firm to find a permanent CEO.
The timing of the CEO turnover isn’t “awkward” because everything was ready for the holiday season, he said.
“It’s not like he’s out in the stores wrapping packages for Christmas,” he added, referring to Storch.
The 10-story Lord & Taylor building, erected in 1914, is known for its distinct Italian Renaissance style and was named a city landmark a decade ago. The iconic property is one of the city’s oldest retail stores and traces its origins to the dry goods stores established by Samuel Lord and his partner George Washington Taylor in 1826.
The sale of the roughly 670,000 square-foot building between 38th and 39th Streets is emblematic of the challenges facing the city’s landlords. Retail tenants are struggling to pay the rent as the rise of e-commerce and a shift in consumer spending habits erodes sales at brick-and-mortar stores. The vacancy rate on Fifth Avenue, the heart of the city’s high-end shopping district and home to the most expensive retail real estate in the world, reached a record last year.
--With assistance from Kim Bhasin, Allison McNeely and Ellen Huet.To contact the reporters on this story: Sandrine Rastello in Montreal at [email protected] ;Sarah Mulholland in New York at [email protected] To contact the editors responsible for this story: Crayton Harrison at [email protected] David Scanlan, Christine Maurus
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