TORONTO — Hudson’s Bay executive chairman and real estate maven Richard Baker might have his sights set on acquiring Macy’s, according to reports that boosted the share price of both companies Friday.

While there might not be much wisdom in a company struggling to deliver consistent returns and move beyond its largely old-world retail trappings running a precariously situated rival, experts agree Baker’s eye is likely on Macy’s real estate.

Citing sources familiar with the matter, the Wall Street Journal reported Friday that the two companies are in preliminary deal talks, including one option that involves Macy’s real estate.

Such a deal would be the fifth Hudson’s Bay has made since 2013, when Canada’s oldest retailer acquired luxury chain Saks Fifth Avenue for $2.9 billion.

Under the stewardship of Baker, HBC has bought the German department store chain Kaufhof, selected real estate holdings belonging to bankrupt Netherlands-based department store chain V&D, and online flash-deals retailer Gilt Groupe.

Still, a deal for the ailing Macy’s chain would face a number of hurdles. The U.S. retailer is carrying roughly US$7.5 billion in debt, and HBC’s market value stands at a mere US$1.8 billion compared with US$9.8 billion for Macy’s.

“Richard Baker is trying to tie up as many iconic flagship locations as he possibly can in Europe, the Netherlands and North America,” said Doug Stephens, founder of Toronto-based advisory firm Retail Prophet. Before Baker tackled Europe, he famously engineered the $1.8 billion sale of Zellers to Target and used it to help fund the US$2.9-billion purchase of Saks. He then took out a US$1.25-billion mortgage on Saks’ flagship Fifth Avenue store in New York.

“Baker sells off the less strategic properties seemingly to fund the next opportunity to buy more iconic properties. Macy’s Herald Square (flagship store) will always hold a value for somebody.”

Alex Arifuzzaman, partner in Toronto retail real estate specialists InterStratics Consultants, said a deal hinges on price, and noted Macy’s shares have been trading at an historically low value, down from a height of $72 two years ago. They closed up 6.4 per cent to US$32.69 on Friday.

“Baker knows how to extract value out of a chain,” Arifuzzaman said. “If HBC can get Macy’s for the right price, they can rationalize various things and focus on the best values for their real estate portfolio. They can sell, sublease, or translate what they have into different banners.”

THE CANADIAN PRESS/Chris Young
THE CANADIAN PRESS/Chris YoungRichard Baker, Hudson's Bay Company's Governor and Chief Executive Officer.

“Richard Baker is trying to tie up as many iconic flagship locations as he possibly can in Europe, the Netherlands and North America”

Macy’s has more than 700 stores across the U.S., but is in the process of closing 68 of its weakest locations this year, and another 30 stores in the next few years to cut costs while it tries to reverse its sliding fortunes. It also owns the Bloomingdale’s department store chain, with 38 stores.

Last month Macy’s slashed its earnings forecast after noting comparable sales, a key metric of retail performance, fell 2.1 per cent in the critical holiday selling period of November and December 2016 combined with the same period a year earlier. Before Friday, Macy’s shares had fallen 23 per cent in the last year.

A source told the Wall Street Journal that Hudson’s Bay could finance a deal by raising equity and debt against its real estate portfolio, or potentially do a deal with a partner.

“We do not comment on rumour or speculation,” HBC spokeswoman Tiffany Bourre said on Friday.

HBC’s shares, which hit an all-time low last month after the company cut its 2016 fiscal outlook for the second time since last fall, were up four per cent.

Both HBC and Macy’s have been grappling with online giant Amazon’s rise in apparel sales while simultaneously trying to enhance their own digital divisions.

Macy’s has been under pressure from activist investor Starboard Value LP to sell its real estate, citing an estimated value of US$20 billion.

Paul Lejuez, analyst at Citi Research, worked up a valuation for Macy’s on Friday using a more conservative figure of US$10 billion for the real estate portfolio and valued the core retail business at US$8 billion, for a total worth of US$18 billion, or about US$40 per share.

Buying Macy’s, Lejuez said, “may help HBC diversify its REIT portfolio, though it would still be highly department-store dependent), and take it public.”

Financial Post

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