Hudson's Bay Co. Exec Richard Baker

Richard Baker and his group of key Hudson Bay Co. shareholders have moved another step toward taking the retailer private.

A special committee of HBC’s board has approved the latest offer by Baker and his group, which collectively own 57 percent of the company, to purchase the remaining 43 percent of the shares for $10.30 per share in cash in Canadian dollars, or $7.86 U.S.

Baker and his group would be purchasing 100 million shares, bringing the cost for the remaining minority stake to 1.03 billion in Canadian dollars. That would value the whole of HBC, operator of Saks Fifth Avenue and Saks Off Fifth in the U.S. and Hudson’s Bay department stores in Canada, at approximately $2.5 billion Canadian.

All subsequent currencies are in Canadian dollars.

The $10.30 offer represents a premium of approximately 62 percent to HBC’s closing share price on the Toronto Stock Exchange on June 7, 2019, the last trading day prior to the announcement of the shareholder group’s initial privatization proposal of $9.45.

It represents a premium of about 52 percent to the 20-day average closing share price on that date, and an increase of 9 percent over Baker’s initial $9.45.

After the announcement Monday, HBC’s stock in Canada rose 7 percent to $10.11.

Aside from Baker, governor and executive chairman of HBC, the shareholder group includes Rhône Capital L.L.C.; WeWork Property Advisors; Hanover Investments (Luxembourg) S.A., and Abrams Capital Management L.P.

“The deal fell apart three different times,” said a source close to the company. “There was a lot of angst putting this together. The buying group didn’t want to pay more than $9.45 but this is a hell of a deal in a tremendously bad environment.”

The special committee of independent directors was established by HBC’s board to consider the initial privatization proposal and other alternatives for the company’s future, including keeping the status quo. The intent was to insure that the deal was fair to the shareholders who are not part of Baker’s group.

After hearing from the special committee, HBC’s board determined that the $10.30 deal is in the best interests of HBC and fair to the minority shareholders.

However, for the deal to go through, a majority of the minority shares need to approve it. A shareholder vote on the privatization offer is expected in mid-December.

There could be some opposition, possibly from The Catalyst Capital Group Inc., a Canadian private equity firm investing in distressed companies which has a significant minority stake in HBC. In August, Catalyst upped its stake in HBC to 16 percent of the shares. Catalyst has opposed Baker’s past offers, and without Catalyst agreeing to sell its HBC shares, it becomes more difficult for Baker and his group to buy the 21.5 percent of the minority shares required for his deal to go through.

As of midday, Catalyst had no comment on Monday’s development.

Activist shareholder Land & Buildings Investment Management LLC has in the past pressured HBC to take action that would raise the stock price and monetize real estate.

Sources said there could also be tax implications to the deal, affecting non-Canadian shareholders.

“Over the last four months, with the assistance of our independent financial and legal advisers, we have conducted a thorough evaluation of the shareholder group’s proposal and alternatives available to HBC to maximize shareholder value,” said David Leith, chair of the special committee, in a statement on Monday. “Following this comprehensive evaluation and extensive negotiations with the shareholder group, and consideration of the applicable risks and the opportunities and alternatives available, we are pleased to have reached an agreement with respect to a transaction that provides immediate and fair value to the minority shareholders. The special committee is confident that this transaction represents the best path forward for HBC and the minority shareholders.”

Baker’s group determined that taking the company private was best for the retailer for several reasons, citing:

• Retail industry headwinds keeping the stock price down.

• HBC needs more capital to be competitive and possibly redevelop properties, though it believes redevelopment would “not result in creating additional value for shareholders in the foreseeable future compared to the certain value provided by the transaction.”

• HBC needs money to pay restructuring costs at stores being closed or sold off in North America and Europe, and also to pay rents at some of its retail locations.

“The cash premium transaction provides minority shareholders with immediate and certain value that is expected to be higher than that realizable in the foreseeable future,” the company said. “Continued industry headwinds and the deterioration in operating performance have negatively affected the company’s financial results. Despite the execution of several strategic initiatives, the company’s share price has continued to decline. 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.”

The special committee retained TD Securities Inc. to come up with a value for the common shares. TD Securities determined that as of Oct. 20, the fair market value of the common shares of HBC ranged between $10 and $12.25 a common share.

In addition, two real estate firms, CBRE Inc. and Cushman & Wakefield Inc., were hired to come up with a value for HBC’s real estate. Based on the analysis, the company estimates its pro rata share of its real estate portfolio being valued at $8.75 per diluted share reflecting “the combination of lower current market rents, the increasing risks associated with the retail industry, recent operating challenges and a deterioration of retail real estate market conditions.”

HBC said that the go-private deal would be funded by its existing cash resources and debt financing arranged by Bank of America, N.A.: BofA Securities Inc., and Royal Bank of Canada.

HBC also has to consider any competing proposals to purchase the company providing a better deal than the one submitted by Baker’s group.

One source noted that once the HBC shares are canceled through the buyback, shareholders receive amounts deemed as dividends which could have tax implications such as paying at a rate that may be higher than what would apply to a capital gain.

The privatization strategy follows a string of major streamlinings by HBC, including currently closing its 15 stores in the Netherlands; unloading its retail and real estate operations in Germany; selling Lord & Taylor to Le Tote after selling L&T’s Fifth Avenue flagship to WeWork, shuttering Home Outfitters in Canada, and closing up to 20 Saks Off 5th stores in the U.S. HBC also last year sold Gilt Groupe to Rue La La.

On the other hand, HBC is pursuing licensing rights to the bankrupt Barneys New York, and Baker has long had his eye on the Neiman Marcus Group to increase the group’s stake in luxury.


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