We may need to brace for the demise of Americaâ€™s largest department-store chain.
Hudsonâ€™s Bay Co., the Canadian owner of Lord & Taylor and Saks Fifth Avenue, is in talks to take over Macyâ€™s, according to a report from The Wall Street Journal on Friday. It would be a spectacular end to a years-long struggle for what was once the star of the retail world.
Taking over the 158-year-old Macyâ€™s would be quite a feat for Hudsonâ€™s Bay, given that its C$1.8 billion ($1.4 billion) in market value is a fraction of Macyâ€™s $13.4 billion market capitalization.
But Hudsonâ€™s Bay is not some retail mastermind looking to bolster its brand with the iconic department store immortalized in â€œMiracle on 34th Street.â€ Hudsonâ€™s Bay is a shrewd real-estate operator more interested in the big buildings that house the clothes and shoes Macyâ€™s sells than the retail operation itself. So if Hudsonâ€™s Bay does buy Macyâ€™s, thereâ€™s no doubt its next steps would include shuttering hundreds of stores. And Macyâ€™s would lose its place as the leader of brick-and-mortar retail.
The best-case scenario then would be a chain of Macyâ€™s stores running a more-efficient business at a much smaller scale. The worst-case scenario: Hudsonâ€™s Bay ends up looking more like Sears Holdings Corp., a decades-long asset sale bound to end with the bankruptcy of one of Americaâ€™s most storied companies.
Hudsonâ€™s Bay bought Saks Inc. for $2.4 billion in 2013, financing the deal with mostly new equity and debt. A few years later, Hudsonâ€™s Bay took some of Saksâ€™s stores, among other properties, and formed a real-estate joint venture with mall operator Simon Property Group. Then, the joint venture borrowed millions of dollars, which Hudsonâ€™s Bay used to pay down some of the debt it took on to buy Saks in the first place. The result was that Hudsonâ€™s Bay got Saks, the company, for less than the price of Saksâ€™s flagship Fifth Avenue store. Hudsonâ€™s Bay used similar magic to buy German retailer Galeria Kaufhof for C$3.2 billion in 2015, financing the deal by selling 40 of 59 Kaufhof properties into its joint venture with Simon. No need to issue additional shares or take on more debt.
The best public data on what Macyâ€™s real estate is worth comes from a January 2016 presentation from activist hedge fund Starboard. Based on Starboardâ€™s estimates and some back-of-the-envelope math, Macyâ€™s owned real estate is worth nearly $18 billion.
Hudsonâ€™s Bay could sell some of Macyâ€™s property into its joint venture with Simon, or another mall operator, given the interest such REITs would have in the chain, which operate in most big US malls.
Hudsonâ€™s Bay may have to issue additional shares and/or take on more debt to buy Macyâ€™s. But it could then get bank or other financing to mortgage the $18 billion worth of property at, say, 60 to 70 percent of total value. That would bring in $10 to $13 billion â€” which, voila, could pay off most of the debt taken on to buy Macyâ€™s in the first place.
Obviously this is all over-simplified math, and thereâ€™s no telling the maneuvers Hudsonâ€™s Bay could make once
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You also have to wonder how President Trump would respond to such a deal. His protectionist bent might inspire him to discourage a foreign company from taking over Americaâ€™s largest department store chain by sales â€” but then you also have to consider his resentment of Macyâ€™s for pulling his clothing line from its stores during the election.
One thing is clear, anyway: Macyâ€™s is in play. And a sale to Hudsonâ€™s Bay could be the end of the department-store chain as we know it.