It could very well be status quo for the Hudson’s Bay Co.
The Toronto-based retailer has postponed a special shareholders meeting to officially tally the votes on a bid by executive chairman Richard Baker and a group of like-minded shareholders, collectively owning 57 percent of HBC, to take the company private.
The meeting had been scheduled for Tuesday this week but was postponed after the Ontario Securities Commission ordered HBC to update its circular on the privatization offer to provide shareholders with greater transparency. HBC will have to present it to the OSC for review before it’s mailed out again to shareholders.
It’s believed that Baker and his group, which offered 10.30 Canadian dollars for the 43 percent of the company they didn’t own, was unsuccessful in its attempt to get the required majority of the minority shareholders to vote in favor of their bid. By the end of last week, it became apparent that not enough of the minority shareholders wanted to take Baker’s deal.
Baker’s group, known as the continuing shareholders, is “contemplating” scrapping its bid, but hasn’t officially pulled it. It seems more than a threat, given that there’s not enough support for the bid.
“It smells likes it’s probably dead. They gave people an opportunity to get a 68 percent premium on their shares and they passed on it,” said one source close to the company.
Baker’s group could come back with another offer, or it could consider selling the company. However, neither of those scenarios seems likely, given Baker’s group has already made it clear that it has no desire to sell the retailer or up its bid. Its message to the minority shareholders has been “take the $10.30 or leave it.”
Baker’s bid values the company at 1.9 billion Canadian dollars, or $1.45 billion.
A rival 11 Canadian-dollar-a-share bid from Catalyst Capital Group, a Canadian firm investing in distressed securities, values HBC at 2.03 billion Canadian dollars, or $1.53 billion.
Another possible scenario is if Baker’s group scraps its bid, then the group dissolves and Catalyst doubles up on efforts to win over key shareholders to its 11 Canadian dollar bid. Catalyst made its 11 Canadian-dollar-a-share offer on Nov. 27.
As it stands, Baker’s group, representing a majority of the HBC shares, can block any offer. Included in the group, aside from Baker, are Rhone Capital LLC; WeWork Property Advisors; Hanover Investments (Luxembourg) SA, and Abrams Capital Management LP.
Sources said Monday that chances are good that Baker and his group, after campaigning vigorously over the last several weeks to win over shareholders, will lay low and ultimately keep the company public.
There is roughly a $70 million gap between the 10.30 Canadian and 11 Canadian offers and Baker and his investors are not likely to want to invest any more of their own money to raise their bid. The 10.30 bid is largely funded through the sale of HBC operations in Germany, disclosed earlier this year.
“I don’t know whether or not Richard and his partners decide to up their bid and try to bid to a resolution, or just backs off and continues to run the business the way it is,” said one former retail ceo. “Or he could wait, the stock price will go down and come back a year from now with another offer.”
Baker’s group had advocated that shareholders take his offer because HBC’s stock was not likely to perform given the challenging retail landscape. The stock traded on Monday at 8.68 Canadian dollars, an indication that the 10.30 Canadian bid wasn’t being supported by enough investors.
“I believe Richard could clearly get a deal done if he wanted to raise the price,” said the retail source. “He’s funding his $10.30 bid out of [asset] sales and not putting a lot of personal money into it.” The source doubted that Baker would put additional debt on the company or put up more of his money or investors’ money, to make a richer offer.
For Baker, there would be advantages to taking the 9.3 billion Canadian dollar company private. For one, he gets more control and an increased ability to effect real estate transactions, including monetizing or repurposing some of the retail real estate, such as Lord & Taylor buildings in Eastchester, N.Y., or Stamford, Conn. still owned by HBC, which sold off the L&T retail operations to Le Tote earlier this year. Also, Baker would no longer be beholden to the demands and scrutiny of the public markets, thereby freeing up time and resources to focus on turning around the retail operations as well as capitalizing on real estate.
HBC said Monday it intends to schedule a new date for the postponed special meeting of shareholders “as soon as practicable” and to provide shareholders with an amended management information circular that will contain additional information that the Ontario Securities Commission requires to be included in the circular. The amended circular will also contain information on amended dates for proper submission of proxy voting instructions and dissent elections.
Catalyst has been vigorously opposing Baker’s 10.30 bid in Canadian dollars. It believes it undervalues the company and that shareholders were sandbagged by recent real estate appraisals, underscoring that HBC four years ago valued its Saks Fifth Avenue flagship in Manhattan at $3.7 billion and this year had it appraised at $1.6 billion.
Catalyst does like the strategy by HBC chief executive officer Helena Foulkes to turn around the retail operations — Saks Fifth Avenue, Hudson’s Bay and Saks Off 5th. Catalyst feels that Baker’s group failed to disclose when they formed the group, and when the special committee of HBC’s board granted a waiver to a standstill agreement with Fabric Luxembourg Holdings.
Catalyst owns more than 17 percent of HBC. Its offer to pay 11 Canadian dollars a share for all of HBC still stands.
On Monday, Gabriel de Alba, managing director and partner of Catalyst, said in a statement, “The formation of the Baker Group was based on highly questionable conduct, including the questionable standstill waiver to Fabric Luxembourg Holdings Sàrl, the lack of proper disclosure on the group’s actions and the use of material non-public information. This group’s existence and behavior has twisted every step taken by HBC, from the launch by the Baker Group of a coercive bid to the inability of the special committee to run a process to create value for shareholders and the lack of negotiations with Catalyst on its superior offer.…A good-faith value maximization process needs to begin.
“The OSC hearings have demonstrated that numerous questions remain unanswered and undisclosed, and the directors of HBC need to finally step up and be transparent,” de Alba said. The disregard for minority shareholders, not to mention the massive waste of shareholder funds, also must come to an end. Minority shareholders have spoken and they do not believe that the insider issuer bid results in maximum value.
“HBC must now seek termination of the Baker group agreement and engage with Catalyst on its superior cash offer of 11 Canadian per share. If the special committee does not act, Catalyst is prepared to take additional steps,” which would include pushing for new HBC board members.
Public Versus Private: The Pros and Cons
• It’s a way to raise big money for expansion and other projects.
• The profile of the company is raised and it’s easy to value the company.
• Control to some degree is abdicated to the public sector.
• Quarterly disclosures and demands of Wall Street consume time and money and add pressure for short-term gains.
• Shares may not be easy to sell.
• Subject to government regulations.
• Control of the company is in the hands of a few investors.
• Easier to plan for the long term, build enduring strategies and worry less about short-term quick fixes.
• Less scrutiny and fewer regulations to adhere to. There’s no need to register with the SEC unless the company grows to $10 million in assets and more than 500 subscribers.
• Harder to raise money. Venture capitalists provide capital in exchange for equity.