With sales waning, Macy's wants to give back more to shareholders.

Activist Starboard Value is ratcheting up the pressure on Macy’s Inc.

Starboard’s Jeffrey Smith sent a letter on Monday to Macy’s chairman and chief executive officer Terry J. Lundgren and chief financial officer Karen Hoguet, urging the retailer to find additional expense reductions. The company last week said it would cut $400 million in expenses and also look more into the possibility of creating real estate joint ventures.

Investors welcomed the prodding and pushed the retailer’s stock up 8.2 percent, or $2.93, to $38.82.

Smith wrote that pursuing joint ventures is “the most prudent step for Macy’s at this time to create significant value for shareholders.”

He cited “the wide discrepancy between the value of the real estate and the current enterprise value of the company,” adding, “We believe that a JV, or series of JVs, can crystallize the value of Macy’s real estate while bringing in a partner with substantial capital and real estate expertise that will enable the JVs to grow and diversify their real estate holdings.”

While urging Macy’s to take more aggressive steps to strengthen the business, Smith’s tone suggested more that he was maintaining a dialogue with Macy’s rather than looking for a fight. However, the letter is a move to rally shareholder support for his Macy’s agenda.

“We appreciate the discussions we have had with you and members of the board of directors over the past few months,” Smith wrote.

Macy’s said it was reviewing the letter and accompanying materials from Starboard.

“We appreciate the input from all of our shareholders, including Starboard,” Macy’s said in a statement. “The viewpoint expressed by Starboard is consistent with actions already under way at Macy’s to explore joint venture and other potential relationships related to the company’s real estate and to improve our profitability from operations. We look forward to continued dialogue with Starboard and other shareholders.”

Last week, Macy’s said it hired Eastdil Secured, a real estate-focused investment bank, to approach potential interested parties, with assistance from Credit Suisse and Goldman Sachs, regarding forming partnerships or joint ventures for the company’s mall-based properties, as well as Macy’s flagships in Manhattan, San Francisco, Chicago and Minneapolis.

Eastdil joined the squadron of experts in the areas of banking, real estate, law and taxes that is helping Macy’s examine how to get the most out of its real estate assets. Tishman Speyer has expressed interest in pursuing partnerships on the four flagship locations and therefore will no longer serve as an advisor on those properties, but will on other real estate in the portfolio. Tishman Speyer is redeveloping Macy’s downtown Brooklyn flagship. Also, Macy’s last week it is searching for a senior-level real estate executive to join the company to oversee and manage real estate activities, including the leadership of any partnerships or joint ventures.

In his letter, Smith said, “The recent announcement that Macy’s is moving forward with pursuing joint venture structures for both its mall-based and iconic properties is a good decision for the company and its shareholders. As you well know, we firmly agree that Macy’s real estate portfolio is extremely valuable.”

Smith has estimated Macy’s real estate is worth $21 billion.

The activist wrote that he was “frustrated with the recent operating performance of the business,” but that he appreciated actions to re-size the cost structure and reduce Macy’s store base.

“We were pleased to see the company announce an immediate reduction in operating expenses of $400 million, with a target of $500 million in expense reductions by 2018. As we have shared with you in other presentations, we, along with our retail — and operations — focused consultants, have identified more than $500 million in cost reductions through a combination of improved labor productivity and [selling, general and administrative expenses] reductions, as well as other [earnings before interest, taxes, depreciation and amortization] improvement opportunities through potential reductions in lost sales with customers who have a clear purchase intent. We believe that as you continue to review the company’s operations, you should find additional opportunities to improve efficiencies.”

Joint ventures could bring in cash to help Macy’s paydown and possibly be taken public on their own.

Smith acknowledged the “challenging retail environment.” Last week, Macy’s said comparable-store sales for the November-December period fell 4.7 percent compared with the same period last year and said earnings would be pressured.

Smith’s letter could be just the tip of the iceberg.

Typically, activist activity revs up as a company prepares for its annual meeting. Macy’s bylaws state that investors wanting to bring business before stockholders must give written notice at least 60 days before the meeting, which is typically held in mid-May. In the months preceding the meeting, activists can discretely push Macy’s for changes but later become vociferous if they don’t get what they want. They could vie for board seats and force a vote at the meeting, and if they land a seat or seats on the board, they can build momentum for their agenda.

Smith has allied with other shareholders to push his agenda, raising speculation of a looming proxy battle. But in an interview in late December, Lundgren said he has some major shareholders in his camp, and that he’s met twice with Smith. They had good “nonhostile” exchanges, he said, adding at the time that he was unaware what actions, if any, Smith would be taking to push his agenda.

Lundgren, seeming cool under pressure, said, “We are responding to all of our shareholders. We are not sitting back. We are taking aggressive action.”

Macy’s already had nixed Smith’s call to create a real estate investment trust, which didn’t provoke a strong reaction from Starboard.

“I think the activist focus was on the value of our real estate and how we could unlock that value,” Lundgren said, adding that the retailer was onto unlocking real estate value “well before the activist came into our stock.” For example, it was already being decided that the Brooklyn flagship would be downsized and redeveloped into mixed use via a joint venture with Tishman Speyer.

Other activist players have also raised their stakes in Macy’s, and collectively, they control 3.1 percent of the company’s stock, according to S&P Capital IQ. That’s not a commanding position, but activists have increasingly had the ear of larger institutional shareholders who can force issues, ultimately voting for change at annual meetings. Starboard has about a 1 percent stake in the retailer.

In its plan on how to unlock shareholder value, Starboard suggests splitting Macy’s real estate assets into two joint ventures, one for its big flagships in Manhattan, Chicago, San Francisco and Minneapolis, and another for mall stores and other locations. Through the joint ventures, Macy’s could improve its share price to about $70 a share, or about twice what it is currently selling for. That $70 estimate would be “before realizing value from the $4 billion of real estate not included in our initial JV transactions, additional steps to further separate the JV’s, or value creation from further improved operations and credit card earnings,” Starboard said in its plan.

“On a sum-of-the-parts basis, Macy’s represents a compelling value story,” Starboard said.

The total value of Macy’s owned and ground leased stores is estimated to be $11 billion, with the owned stores estimated to be $8.8 billion and the ground leased stores $1.9 billion.

The total value of Bloomingdale’s owned and ground-leased stores is estimated to be $1.4 billion, with the owned stores estimated to be around $955 million and the ground leased stores $483 million.

That’s enough to keep activists like Smith hot on Macy’s heels.

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