In his pursuit of marquee-name retailers, Richard Baker, governor and executive chairman of Hudson’s Bay Co., appears to be on a dual track — eyeing both Macy’s Inc. and Neiman Marcus Group, according to sources.
Most recently, he’s been in talks with Macy’s about a possible takeover or merger. But Baker, a savvy dealmaker with an eye for undervalued real estate, hasn’t given up on Neiman’s, which has been on his radar for years.
In either case, there would be synergies, best practices, access to different brands and designer labels, retail talent and a lot of volume and store locations to be gained. With Macy’s, there’s the added appeal of some valuable, owned-flagship properties, such as Herald Square in Manhattan and on State Street in Chicago, and Macy’s $27 billion in revenues.
With Neiman’s, HBC would gain North America’s most prestigious luxury chain and its crown jewel Bergdorf Goodman, which could bolster the HBC-owned Saks Fifth Avenue chain. HBC already owns Saks Fifth Avenue, Lord & Taylor, Hudson’s Bay, Kaufhof in Germany, Gilt and other retailers.
But there are downsides to both potential deals given that HBC would, in either case, be saddled with what many consider to be a broken business model in need of some major fixes. It’s a toss up whether Neiman’s or Macy’s is better off trying to repair itself, or needs the help of an outsider.
Macy’s is in the process of shuttering more than 60 stores this year and about another three dozen in the next few years, and is working to turn around negative sales trends. Neiman’s is grappling with huge debt and reduced store traffic and sales, but opens a Fort Worth, Texas, flagship this week. At both retailers, tourist spending has dried up.
On Friday, shares of Macy’s closed at $32.69, up $1.97, or more than 6 percent, amid the mounting reports that Macy’s was in play and that HBC was in pursuit.
“I think it’s real,” said one retail source. “Richard Baker has been looking. But in this case, he’ll need partners.” 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. HBC investors seemed open to the idea, however, and the company’s stock closed up 3.9 percent on the Toronto Stock Exchange, to 10.39 Canadian dollars, or $7.98.
However, another source close to HBC indicated that talks between the group and Macy’s are “very preliminary” and that HBC is looking at other potential retail acquisitions.
The source noted that HBC has $14 billion in real estate and that it has the wherewithal to orchestrate a deal with Macy’s that would be structured similarly to its 2015 purchase of the Kaufhof German department store chain, where real joint ventures were established with no debt or equity involved, to fund the acquisition.
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, San Francisco 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 said.
The firm 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 noted 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.
The question of how much HBC would need to pay for Macy’s was addressed by a report by Stifel Research. “We estimate $40 per share…and a 30 percent premium to today’s [Friday’s] opening bid. This is not based on any underlying valuation calculation but rather the approximate midpoint of the range of premiums paid for retail buyouts in recent years. The estimates in the public domain value Macy’s with its real estate at $20 billion, or $65 per share, and the public market this morning at $10 billion or $30 per share. The large estimate involves a speculative valuation of the real estate, which we believe to be optimistic.”
Stifel also indicated that “with both companies’ balance sheets well leveraged already, we believe that a buyer would look to unlock some of the real estate value at both companies. Sale-leaseback of occupied locations, mortgages on selected properties and sale of real estate to a third party or partner are all reasonable propositions that we believe are possible. This is based on the innovative (for a retailer) and effective capital raising that has been achieved to date at HBC.”
Stifel noted that Baker bought the Saks Fifth Avenue chain for $2.9 billion and later appraised the Saks Fifth Avenue flagship in Manhattan for $3.7 billion.
Stifel posed the question, “Could a former real estate professional, Richard Baker of HBC, with a successful record of realizing value from retail real estate have greater success than Macy’s management? Certainly a possibility, in our view, but without certainty.”