Hudson’s Bay’s Richard Baker leads $1-billion bid to take retailer private

June 10, 2019

By Marina Strauss Retailing Reporter | The Globe and Mail

Hudson’s Bay Co. executive chairman Richard Baker is leading a $1-billion cash proposal to take the iconic company private, a big bet on the turnaround prospects of the long-struggling retailer.

Toronto-based Hudson’s Bay, which owns its namesake chain and the luxury Saks Fifth Avenue, also has a deal to sell about half of its European operations to its partner overseas for about $1.5-billion. That transaction needs to close before Hudson’s Bay is taken private.

At $9.45 a share, the proposed go-private bid by Mr. Baker and other shareholders, who already own the majority of Hudson’s Bay, represents a premium of 48 per cent to Hudson’s Bay’s closing share price on Friday of $6.37 a share on the Toronto Stock Exchange. The company’s shares closed on Monday at $9.07, a 42-per-cent jump from Friday but a little below the proposed privatization price, suggesting shareholders don’t necessarily expect a higher offer.

“Like many other retailers, Hudson’s Bay Co. continues to face a number of difficult challenges in a fast-changing environment,” Mr. Baker wrote in a letter on Monday to David Leith, chairman of a special committee of Hudson’s Bay’s board of directors.

“We believe that improving Hudson’s Bay’s performance requires significant time and patient long-term capital that is better suited in a private company context without the emphasis on short-term results and returns.”

Mr. Baker has taken many risks since he led a group that acquired the troubled Hudson’s Bay in 2008, some of which have worked and some of which have not. Now, he wants to make what could be his biggest bet yet by investing in a money-losing retailer in a sector that is being shaken up by online competition.

With 57 per cent of shareholders already approving the privatization, another 21.5 per cent would be needed for it to be successful.

“Something had to be done at Hudson’s Bay,” said Alex Arifuzzaman, founder of retail real estate adviser InterStratics Consultants Inc. “When you look at its earnings in the past few years, it’s not going in the right direction. … The bottom line is: The entire retail industry, especially department stores, is in a complete restructuring phase now.”

HBC, which has struggled with weak results, has been divesting underperforming divisions and stores under chief executive officer Helena Foulkes, a U.S. retail veteran who took the top job at Hudson’s Bay in early 2018.

It sold half of its European business, its flagship Lord & Taylor store in New York, and its Gilt.com flash-sale fashion site. It is shutting some of its U.S. Lord & Taylor and Saks Off 5th outlets and all 37 of its Home Outfitters stores in Canada. Last month, it said it was considering selling its entire U.S. Lord & Taylor chain.

But the initiatives haven’t been enough to stem the flow of red ink in its continuing operations nor the stock price’s decline as the company failed to cash in on the value of its real estate.

“Though Hudson’s Bay has long tantalized investors with potentially massive upside in its real estate, it has brought inconsistent execution in an immensely challenging industry,” Mark Petrie, retail analyst at CIBC World Markets, said on Monday. “And though there have been encouraging signs under new management, material risks still exist on many fronts.”

Mr. Baker led the purchase of the troubled, privately held Hudson’s Bay two years after he acquired Lord & Taylor. He hired some experienced retail leaders, including Bonnie Brooks, to spearhead a turnaround. And, in one of his standout moves, he oversaw the sale of Hudson’s Bay’s Zellers stores to U.S.-based Target Corp. for more than the price for all of Hudson’s Bay. The Zellers sale paved the way for the U.S. rival’s foray into Canada, which turned into a complete retreat. Under Mr. Baker, Hudson’s Bay returned to the public markets in late 2012 at $17 a share. That’s a far cry from its $6.37-a-share closing on Friday and the $9.45-a-share privatization proposal.

Mr. Baker had less success in other areas. The company’s acquisition of German-based Galeria Kaufhof in 2015 didn’t play out well, and Hudson’s Bay made some missteps in its management of Saks Off 5th.

Meanwhile, Hudson’s Bay and other department store chains grappled with intensifying competition from digital forces, including powerhouse Amazon.com Inc. While Hudson’s Bay slashed costs and staff, the efforts still didn’t make enough of a difference amid high turnover in its top ranks.

Under Ms. Foulkes, who has been praised as a skilled retail leader, Hudson’s Bay has been unloading unprofitable properties and focusing on its stronger North American assets, especially Hudson’s Bay and Saks. But it has been under pressure from U.S. investor Land & Buildings Investment Management LLC to go further to realize the value of its real estate – and particularly to sell its lucrative Saks Fifth Avenue flagship store in Manhattan. The company has taken some steps to appease investors, but resisted parting with Saks’s main store, which is a landmark in New York. (Jonathan Litt, founder of Land & Buildings, which was believed to own about 3 per cent of Hudson’s Bay’s shares last fall, could not be reached on Monday.)

Patricia Baker, retail analyst at Bank of Nova Scotia, said she expects the privatization to succeed, especially given the controlling group’s 57-per-cent ownership.

“Certainly turning around this type of operation will be easier to do outside the scrutiny of the public markets,” she said.

The proposed take-private deal would depend on the closing of the sale of Hudson’s Bay’s half-interest in its European real estate joint venture and 49.99-per-cent stake in its European retail joint venture to SIGNA, Hudson’s Bay’s overseas partner. The proposal represents a premium of 39 per cent to Hudson’s Bay’s 20-day average closing price, the company said. It said the purchase price is equal to the amount the Ontario Teachers’ Pension Plan Board accepted for the sale of its block of about 10 per cent of Hudson’s Bay’s shares in January. The stock has dropped significantly since.

Along with Mr. Baker, Hudson’s Bay’s majority shareholders are Rhône Capital LLC, WeWork Property Advisors, Hanover Investments (Luxembourg) SA and Abrams Capital Management LP. Office-sharing firm WeWork acquired the flagship store of Lord & Taylor from Hudson’s Bay this year and plans to operate above the Hudson’s Bay flagship store in downtown Toronto.

Burt Flickinger, managing director of consultancy Strategic Resource Group in New York, said Hudson’s Bay’s planned sale of its stake in the European division will give the retailer capital to help repair the damage that’s been done to the company. He envisions Hudson’s Bay eventually could buy debt-ridden Neiman Marcus in a move to consolidate the luxury market in North America and beyond.

THE HUDSON’S BAY COMPANY: KEY DATES

May 2, 1670 – England’s King Charles II signs royal charter giving exclusive trading rights over Hudson Bay drainage basin to “the Governor and Company of Adventurers of England trading into Hudson Bay.”

1780 – Introduction of iconic striped Hudson Bay blanket

1821 – Merger with Montreal-based rival North West Company

1863 – Hudson Bay shares begin trading on British markets

1869 – Under “Deed of Surrender,” HBC cedes control of lands to the newly formed Canadian government in a $1.5-million sale

1881 – First Hudson Bay store opens in Winnipeg

1929 – Company begins to spin out oil and gas assets

1960 – HBC acquires Montreal chain Henry Morgan & Co.

1965 – “The Bay” brand is launched

1978 – HBC buys Simpsons department stores and Zellers discount chain

1979 – Thomson family wins control of HBC after battle with the Weston clan, sells stake by 1997

1987 – Head office moves from Winnipeg to Toronto

1993 – HBC acquires Vancouver-based Woodward’s

1998 – Zellers buys Kmart Canada

2000 – The Bay launches online shopping site

2006 – American millionaire Jerry Zucker takes HBC private for $1.13-billion

2008 – After Mr. Zucker’s death, New York real estate developer Richard Baker acquires HBC stake

2011 – HBC sells Zellers leases to Target Corp. for $1.8-billion

2012 – Initial public offering of HBC at $17 a share

2013 – HBC acquires Saks for US$2.9-billion

2015 – HBC acquires Germany’s Galeria Kaufhof for $3.6-billion

June 10, 2019 – Richard Baker makes HBC buyout offer at $9.45 a share, sells remaining Galeria Kaufhof ownership and real estate assets for $1.5-billion

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