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Wall Street Pushes Saks, Hudson’s Bay Higher

Shareholders on both sides of the proposed buyout were happy Monday.

Shareholders on both sides of Hudson’s Bay Co.’s proposed buyout of Saks Inc. were happy Monday.

This story first appeared in the July 30, 2013 issue of WWD.  Subscribe Today.

Investors pushed Hudson’s Bay’s stock up 5.8 percent to 17.45 Canadian dollars, or $16.97, on the Toronto Stock Exchange — a big vote of confidence given the risks of integrating another department store business into the company’s portfolio and taking on additional debt. Saks’ stock increased 4.2 percent to $15.95. A total of 66.7 million Saks shares traded hands, well above the 2.7 million daily average for the last three months.

Under the terms of the deal, Saks has 40 days to try to find a better offer.

Paul Trussell, an analyst who follows Saks at Deutsche Bank, said the purchase price of $16 a share, or $2.9 billion including debt, was a “fair price” and that investors have been frustrated by Saks’ stock price for years.

“Their valuation was grouped a bit more with the national department store chains — Macy’s, Kohl’s and Penney’s — and [Saks’ shareholders] were probably seeking something closer to a luxury brand multiple, which it was not getting in the marketplace,” Trussell said.

The analyst said Saks, under the Hudson’s Bay umbrella, would be able to more easily expand into Canada, cut back on costs and realize the value of its real estate.

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The ultimate selling price of Saks was a subject of much debate in recent weeks, with some estimates going as high as $19 a share. The companies noted that the purchase price represented a roughly 30 percent premium over the company’s closing price on May 20, before word began to spread that Saks was looking for a buyer.

“The $16 offer price is at the high end of the $15-to-$16 range that we suspected an acquirer would be willing to pay,” said Deborah Weinswig, an analyst at Citi.

Weinswig noted it was unlikely that a higher bid would come in and that Saks was a good strategic fit for Hudson’s Bay.

“You’re going to have a stronger Saks,” she said. While the brand had been looking to shrink its store base, it now appears to be reversing course.

“[Saks] could end up giving Neiman’s a run for their money,” Weinswig said, noting that Hudson’s Lord & Taylor division could also pick up its game and learn something from Saks. “There’s a bigger master plan here, where you could see a bigger competitive impact than we’re thinking about right now.”

Matthew Boss, an analyst at J.P. Morgan, said the buyout carries an implied multiple of 11.4 times earnings before interest, taxes, depreciation and amortization for the past 12 months.

Boss said that’s better than the average retail multiple for the past 10 years of 9.5 times EBITDA, and added that the premium was “reasonable given substantial underlying real estate value…and an underearning financial model.”

The analyst said the acquisition would increase the Canadian company’s scale in buying and distribution and improve Hudson’s Bay’s “competitive positioning in the midtier and luxury channels.”

The biggest winners in the deal could be Saks’ top shareholders — Mexican billionaire Carlos Slim Helú, who holds 23.1 million shares, and Tod’s chief Diego Della Valle, who owns 22.7 million shares. The takeover values Slim’s stake at $369.6 million and Della Valle’s at $363.2 million.

With the go-shop provision, they have at least a chance at a bigger payday.

Rick Snyder, senior analyst at Maxim Group, said Hudson’s Bay’s bid undervalues Saks and that there was a “reasonable chance” of another bidder emerging.

Snyder said the brand’s positioning and its omnichannel opportunities should garner $18.50 a share. He noted there are 35 geographic areas within the U.S. that could support Saks stores and that omnichannel selling “allows Saks to reach the smaller clusters of these customers without the expense of having a store.”

Walter Loeb, retail consultant and former Wall Street analyst, said, “I believe it will be operated as a separate company, as it is not easy to merge it either with Lord & Taylor or The Bay. I also think a Saks boutique can be opened in several of The Bay stores, giving exposure to the Saks nameplate.”

Loeb wasn’t sure if full-fledged Saks stores would work in Canada. “I was a trustee at Hudson’s Bay Co., and the Canadian customer is different from the American consumer in terms of shopping habits,” he said. “They are more frugal. That’s why Saks boutiques would make more sense, as it could help attract more upscale customers to The Bay.”

Loeb said the Saks name could be exported throughout the world. The retailer already has stores in the Middle East.

As for whether a higher price could be had from others during the 40-day go-shop period, Loeb said, “No, not higher; $16 a share is about as much as I would expect.”

Bank of America Merrill Lynch and RBC Capital Markets advised Hudson’s Bay on the transaction, while Saks worked with Goldman Sachs, Morgan Stanley and Guggenheim Securities.