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Digital Daily issue 03/06/2017

Talks between Hudson’s Bay Co. and Macy’s have run aground, with the two department store retailers unable to come to terms on a deal, according to sources.

This story first appeared in the March 6, 2017 issue of WWD. Subscribe Today.

“Frankly, there is no agreement,” said a source close to the situation. “It’s purely about money. Macy’s wants more money and HBC wants to pay less. There’s no meeting of the minds.”

HBC is said to have the resources to finance a deal at the price they wanted to pay for Macy’s, and possibly even a Chinese partner lined up. A Macy’s deal would be too big for HBC to tackle alone. HBC would not confirm having a partner.

“It’s not a question of financing. HBC is not having financing problems,” said the source.

Other issues could have surfaced during the talks, such as how management of the combined structure would have been organized and who would continue in leadership roles in a combined entity, and who wouldn’t.

With Macy’s out of the picture for now, the question becomes where does the acquisition-minded Richard Baker, HBC’s governor and executive chairman, turn his attention, though sources indicated that he has not given up forever on Macy’s and would always have other retail properties in mind as well. As business conditions and stock prices change, the Macy’s courtship could one day be revived.

The Neiman Marcus Group has been on Baker’s radar for years, but NMG is saddled with $4.9 billion in debt and sagging sales and store traffic. NMG operates the Neiman Marcus, Bergdorf Goodman, Last Call and Cusp stores as well as and Horchow. There’s plenty of rationale for combining the Neiman’s and the HBC-owned Saks Fifth Avenue luxury chains.

Talks between HBC and NMG have been held in the past, though a deal, similar to the Macy’s situation, is a long shot. Sources have said that the owners of NMG, Ares Management and Canadian Pension Plan Investment Board, are not willing to sell at the price HBC wants to pay. Ares and CPPIB bought NMG for $6 billion in 2013.

The situation could change with Neiman’s seeking to restructure its debt. It is believed to have hired Lazard Freres to assist in the effort, though Neiman’s would not confirm that.

HBC could involve Simon Property Group, Brookfield Asset Management or some other real estate firm, in a retail acquisition, through a joint venture involving the sale and leaseback of properties. HBC has already established joint ventures with the Simon Property Group and the  RioCan Real Estate Investment Trust, and Brookfield is working with Macy’s to redevelop and monetize up to 50 properties.

HBC, which describes itself as a global consolidator of department stores, owns Saks Fifth Avenue, Lord & Taylor, Hudson’s Bay, Home Outfitters, Saks Off 5th, Galeria Kaufhof, Galeria Inno, Sportarena and Gilt.

HBC could also be eyeing the Selfridges Group, which consists of Brown Thomas in Ireland, Holt Renfrew in Canada, Selfridges in the U.K. and de Bijenkorf in the Netherlands. However, the Selfridges Group is controlled by Canadian billionaire Galen Weston, who has not demonstrated an interest in selloffs.

The Lane Crawford Joyce Group in Asia, which is owned by Hong Kong businessman Peter Woo, could also be of interest to Baker. The group includes the Lane Crawford luxury department stores; the Joyce specialty chain, and the Pedder Group retail, brand management and distribution company.

Baker was recently in Hong Kong reportedly to line up an investor in a bid for Macy’s and for other purposes.

HBC has $14 billion in real estate and could have structured a Macy’s deal 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.

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 attractive to a buyer. Macy’s flagship properties in cities such as Chicago and New York are also highly valued, as well as some of its brands, including Bloomingdale’s.

Macy’s would be a big haul for HBC to swallow, considering it’s capitalized at about $2 billion while Macy’s is over $9 billion. Macy’s has about $7 billion in debt.

Macy’s closed more than 60 stores this year, will close about another three dozen in the next couple of years and needs to overhaul many existing stores so they attract greater traffic and become more productive, and exciting to shop.

On Friday, Moody’s Investors Service downgraded Macy’s senior unsecured credit rating to “Baa3” from “Baa2.” The outlook on the rating was changed to stable from negative.

The debt watchdog said the move reflects “the continued secular shift in apparel demand to alternative channels such as off-price and e-commerce…increasing the risk profile of the department store space.”

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