By Dana Mattioli, Suzanne Kapner and David Benoit
Canada's Hudson's Bay Co. has approached Macy's Inc. about a
takeover, people familiar with the matter said, as the biggest U.S.
department-store chain grapples with disappointing results and
restive shareholders.
Talks between the companies are at a preliminary stage and also
encompass other ways they could cooperate, one of the people said,
adding that a deal for only Macy's real estate is also a
possibility. Other details of the talks are unclear and it is far
from guaranteed there will be any deal.
Shares of Macy's jumped 6.4% to $32.69 Friday after the The Wall
Street Journal reported the talks.
Hudson's Bay is an acquisition-hungry owner of marquee names in
retail including Lord & Taylor department stores and Saks Fifth
Avenue. While its market value is dwarfed by that of Macy's -- 1.9
billion Canadian dollars ($1.4 billion) compared with $10 billion
as of Friday's close -- Hudson's Bay could raise equity and debt
against its real estate portfolio, which could be worth $14
billion, one of the people said. It could also bring in a
partner.
But potentially complicating a takeover, Macy's is saddled with
about $7.5 billion in debt.
Macy's has struggled in recent years amid increasing competition
from upstarts as shopping habits change and consumers buy more
online. Its stock has fallen more than 50% from the highest level
it reached in 2015. Its sales in the quarter ended in late October
fell 4.2% from a year earlier to $5.63 billion.
It is facing mounting investor pressure to turn around its
performance and reverse the stock drop. Starboard Value LP took a
stake and called on Macy's to hive off its valuable real estate,
which the activist investor says is worth more than $20 billion.
Macy's later added a Starboard ally to its board.
Macy's in June said its longtime chief executive, Terry
Lundgren, would step down later this year and hand the reins to one
of his top lieutenants, current President Jeff Gennette.
Hudson's Bay views Macy's as a healthy company with good cash
flow that just needs to invest more in its business, one of the
people said. Hudson's Bay is also considering potential deals with
other companies, this person said.
As of January, Macy's operated more than 800 stores. In addition
to its flagship Macy's stores, the Cincinnati company owns upscale
department-store chain Bloomingdale's. Its recent travails mark a
change in fortune for Macy's, which once was a dominant player in
retail that gobbled up competitors in a series of acquisitions.
In 2005, Mr. Lundgren orchestrated the merger of the two biggest
chains, Federated Department Stores Inc. and May Department Stores
Co., creating what today is the largest U.S. department-store
chain.
Macy's was one of the brands owned by Federated, and the whole
company was renamed Macy's in 2007 as Mr. Lundgren eliminated
regional brands like Burdines, Filene's and Marshall Field's.
But the retail sector has been pressured in recent years by a
change in consumer habits. Department stores have been slow to
adapt to a consumer shift to online shopping on sites like
Amazon.com Inc. and so-called fast-fashion chains such as Zara and
Hennes & Mauritz AB. Declining foot traffic in shopping malls
as well as the ability of consumers to compare prices online before
buying products has hurt department stores.
At the same time, a bifurcation in shopping habits toward the
highest and lowest ends has been bad for retailers like Macy's that
cater to midrange customers.
In July 2015, Starboard made a public presentation that said the
stock market wasn't properly valuing the real-estate assets inside
Macy's. The activist, which held a 1% stake as of the end of
September, said the property was worth $21 billion, including $4
billion alone for the flagship Herald Square store on 34th Street
in Manhattan. It said the entire company was worth $33.7 billion,
roughly double the price at the time, but the stock has plunged
since then.
In January 2016, Starboard reiterated its case and said Macy's
could structure a joint venture, similar to the one Hudson's Bay
struck with Saks Fifth Avenue's flagship Manhattan property -- by
partnering with a real-estate investment firm.
Macy's has been selling some stores, and recently formed a joint
venture with Brookfield Asset Management that could enable 50 or
more stores to be fully or partially redeveloped. But the company
has resisted a traditional sale-leaseback of its real estate
portfolio, as Starboard and others have advocated, saying the move
wouldn't be in its long-term interest.
Macy's started as a dry goods store by Rowland Hussey Macy on
the corner of 14th Street and Sixth Avenue in Manhattan in 1858.
Over time, the store grew into a full-fledged department store, and
in 1902 it opened its Herald Square location, according to the
company's website. After going public in 1922, it began to acquire
other department stores. In 1994, Federated Department Stores
acquired R.H. Macy & Co.
Hudson's Bay Chairman Richard Baker has made a habit of
unearthing hidden value in the real estate of retail chains he has
acquired.
A year after the Canadian company bought Saks Fifth Avenue in
2013, its flagship store on Fifth Avenue was appraised for $3.7
billion -- more than the $2.9 billion Hudson's Bay spent to acquire
the entire chain.
Hudson's Bay has also formed joint ventures with mall owners and
property developers aimed at showing shareholders the value of its
real estate without selling it off.
In a 2015 interview with the Journal, Mr. Baker said many
retailers aren't properly valued by the market because investors
don't fully understand the real estate they hold.
Still, Hudson's Bay stock has lost more than 60% since its highs
in 2015. Its shares rose 3.9% to CAD10.39 in Toronto on Friday.
Corrections & Amplifications Hudson's Bay's market value was
1.8 billion Canadian dollars, or $1.4 billion U.S., as of Friday
morning. An earlier version of this article incorrectly stated the
amount as $1.8 billion.
Write to Dana Mattioli at dana.mattioli@wsj.com, Suzanne Kapner
at Suzanne.Kapner@wsj.com and David Benoit at
david.benoit@wsj.com
(END) Dow Jones Newswires
February 04, 2017 02:47 ET (07:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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