Macy's


Wall Street’s getting pumped about a possible Macy’s Inc. deal.

Shares of the retailer jumped 7.6 percent to $33.04 in midmorning on today amid mounting reports that the struggling $27 billion department store is in play and that Richard Baker’s Hudson’s Bay Co. is in pursuit.

Sources this week indicated HBC and Macy’s have held talks about a possible merger or takeover of Macy’s, in a switch from Baker’s widely known interest in pursuing the Neiman Marcus Group. But a Macy’s deal would likely require HBC to recruit partners in a transaction.

“I think it’s real,” said one retail source. “Richard Baker has been looking. but in this case, he’ll need partners,” the source said, Baker is executive chairman of HBC. The source cited private equity or real estate companies as possibilities. “Real estate guys have a vested interest in these [Macy’s] properties. “Baker thinks he can make it happen. But he’ll have to ask himself, how many properties is he going to want to keep?”

HBC had no comment on Macy’s Friday morning. Investors seemed open to the idea, however, and the company’s stock traded 4 percent higher in midday trading, to 10.40 Canadian dollars, or $8 at current exchange.

However, another source close to HBC  indicated that talks between HBC and Macy’s are “very preliminary” and that HBC is looking at other potential retail acquisitions and possibly not just in America. In the past, it has held talks with the Neiman Marcus Group.

The source noted that HBC has $14 billion in real estate and that it has the wherewithal to orchestrate a deal with Macy’s structured similarly to its 2015 deal to buy the Kaufhof German department store chain, where real joint ventures were established with no debt or equity involved. 

However, Baker might not be the only interested party in Macy’s Inc.

According to a report by Cowen & Co., Macy’s inexpensive valuation — the stock is down to $30-plus from a 52-week high of more than $45 — its real estate assets of $15 billion to $20 billion, and $2.8 billion in free cash flow profile, make it potentially attractive to a buyer.

“But prospects for a deal are offset by a lack of potential synergies, structural store traffic issues, and share loss prospects from Amazon and off-price” retailers, Cowen noted in its research report.

With Macy’s in the midst of a turnaround, “We see numerous headwinds for potential strategic buyers. Our view is that Macy’s vendor and buying model and supply chain lead times are too long; lack of buying agility and speed has added markdown risk, weather risk and inventory overages leading to too much unhealthy promotions on a multiyear period. Additionally, we believe shoppers are transitioning away from shop-in-shop brand models — there’s no more loyalty — towards curated assortments, which does not bode well for the similarity of all Macy’s stores. A buyer would likely need to be excited or prepared to execute better than current management with respect to a turnaround — and we do believe Macy’s is well aware of the situation and opportunities ahead.”

Cowen cited a stronger U.S. dollar driving tourism down and potential border taxes adding to risk to a deal.

HBC’s own debt level and depressed stock could further make the transaction “prohibitive” but HBC would be interested in Macy’s flagship properties in such cities as Chicago and New York and brands including Bloomingdale’s.

“HBC management may not want to issue additional equity to fund the transaction because we do believe the stock’s valuation is very modest.”

Cowen cited real estate developers Simon Property Group, General Growth Properties and Brookfield Asset Management as potential interested parties, and the possibility of a joint venture involving the sale and leaseback of properties. Brookfield is already working with Macy’s to redevelop and monetize up to 50 properties. But Cowen notes that Macy’s previously commented that a real estate investment trust “does not create enough significant value at this time.”

“Other strategic buyers could be international consumer retail companies such as Fast Retailing, Primark or companies from the Middle East or Asia. We believe a U.S. asset could be potentially interesting to these parties if they are looking for tangible assets — but there may be geopolitical risk,” Cowen wrote.

Cowen also cited the possibility of a leveraged or management buyout though long-term forecasts and increased debt would be issues.

“We think Amazon would be very interesting and transformational,” Cowen wrote, citing Amazon’s new interest in brick and mortar and the opportunity of establishing vendor partnerships through a Macy’s deal.

“We do believe Macy’s would likely prefer a strategic buyer, or a buyer who understands and likely appreciates Macy’s current setup for a comeback…management most likely prefers a scenario in which current strategies are executed: a disciplined store closure program, continued focus on omnichannel development, thoughtful monetization of real estate over time, reduction of management layers to drive speed, continued merchandise and fashion execution.

“We are intrigued by the idea of a company such as Amazon, Google, eBay or Facebook acquiring Macy’s — this would be a revolutionary combination of establishment retail meets new media,” the report said.

Cowen also said that golden parachutes could be a catalyst for a deal, with estimated full walkaway value of $122 million as of the end of fiscal 2015 based on a share price then of $40.01, compared to the current price hovering around $30. Outgoing chief executive officer Terry J. Lundgren would receive more than $80 million; chief financial officer Karen Hoguet would receive about $15 million; Jeffrey Gennette, incoming ceo, would receive about $12 million, and chief stores officer Jeffrey Kantor would receive close to $15 million, Cowen wrote.

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