A group led by Hudson’s Bay Co. executive chairman Richard Baker raised its takeover offer for the department store chain by $100-million on Monday and won approval for the bid from members of the company’s board of directors.
Now the 53-year-old real estate executive and his backers need to convince the majority of HBC’s remaining shareholders to take their cash, rather than continuing to own a stake in a 350-year-old retailer. HBC runs more than 300 stores under the Saks Fifth Avenue, Hudson’s Bay, and Saks OFF 5TH banners.
Mr. Baker, a group of private equity funds and an arm of WeWork Companies Inc. boosted their offer for the 43 per cent of HBC they do not own to $10.30 per share, up from an opening bid of $9.45 per share in June. A five-member special committee of independent HBC directors dismissed the original overture as “inadequate” in August, but endorsed the new price, which values the outstanding shares in HBC at $1.1-billion.
“We are pleased to have reached an agreement with respect to a transaction that provides immediate and fair value to the minority shareholders,” said David Leith, chair of the HBC special committee and a former investment banker, in a press release. Mr. Leith said: “The special committee is confident that this transaction represents the best path forward for HBC and the minority shareholders.”
The new buyout offer comes at a 62-per-cent premium to the price of HBC stock prior to the consortium’s opening bid last June. HBC shares last traded on Friday at $9.45 on the Toronto Stock Exchange. HBC expects to hold a shareholder vote on the offer in December.
The bid needs to win support from a majority of HBC’s minority shareholders. That group includes Land & Buildings Investment Management LLC. and Catalyst Capital Group Inc., which also dismissed the opening offer from Mr. Baker’s group as inadequate.
HBC lost $709-million in the last six months on sales of $3.7-billion. Mr. Baker and his consortium are framing the decision as a choice between the certainty of cash versus continuing to own aging stores facing steadily rising competition from digital platforms such as Amazon.com Inc. In a presentation, HBC said that 8,500 U.S. stores have closed so far this year. HBC said the $10.30 offer “provides certainty when compared to other alternatives in the current challenging retail and deteriorating retail real estate environment.”
Mr. Baker’s group increased its offer in the wake of a valuation commissioned by the special committee and conducted by TD Securities Inc. that stated HBC stock is worth between $10 and $12.25 per share. The special committee also hired two real estate appraisal firms and they pegged the price of HBC’s 79 properties, many of which are in downtown locations, at $8.75 a share. That is well below the $20-plus-per-share value on HBC real estate put forward in recent years by shareholders such as Land & Buildings.
The sweetened bid for HBC comes at a time when department stores face significant challenges, as their customers shift to online shopping. Since Mr. Baker’s consortium made their opening offer in the spring, rival Barneys New York filed for bankruptcy and Macy’s Inc. stock price fell by 30 per cent. Office real estate companies – potential buyers and renovators of department stores – also face headwinds, with WeWork pulling a long-planned initial public offering this month. After reviewing HBC’s properties, the special committee said: “Redeveloping the company’s real estate would not result in creating additional value for shareholders in the foreseeable future, compared to the certain value provided by the transaction.”
HBC closed the sale of its European real estate and retail joint ventures to its partner, SIGNA Retail, in early October for $1.5-billion. That money will fund a significant portion of Mr. Baker’s group’s bid to take the company private. The buyout group will also borrow from Bank of America and Royal Bank of Canada to fund its bid. Beside Mr. Baker, the buyout consortium is made up of Rhone Capital LLC, WeWork Property Advisors, Hanover Investments (Luxembourg) SA and Abrams Capital Management LP, and they currently own 57 per cent of HBC.
Mr. Baker’s consortium is working with investment banks BofA Merrill Lynch and RBC Capital Markets and law firms Stikeman Elliott LLP and Willkie Farr LLP. HBC hired J.P. Morgan as lead financial advisor, along with Centerview Partners and TD Securities. The company’s lawyers are from Blake, Cassels & Graydon LLP in Canada and U.S. law firm Paul, Weiss, Rifkind, Wharton & Garrison.
Mr. Baker is CEO of privately-owned National Realty & Development Corp., a Purchase, New York-based firm founded by his father. The Cornell graduate took the reins at HBC in 2008. In 2011, Mr. Baker authored a landmark deal in Canadian real estate by selling the leases on 220 Zellers stores to U.S. retailer Target for $1.8-billion. Target quit Canada within three years of moving into the country after losing more than $2-billion.