A Strategy to Skirt the Retail Carnage: Hudson’s Bay Aims to Go Private

Selling the venerable Lord & Taylor fashion chain is expected in HBC's turnaround effort.

Canada’s Hudson's Bay Co., owner of Saks Fifth Avenue, has tried everything to appease shareholders, from cutting costs to selling off assets. None of it has halted the stock's steady decline, so chairman Richard Baker is stepping in with a cash bid valued at about $1.31 billion to take the company private.

Baker is teaming up with investors, including Rhone Capital LLC and WeWork Property Advisors, to offer $7.12 a share for the remaining stock of Hudson's Bay. The group owns about 57% of the company's outstanding common shares, and the offer represents a 48% premium to the retailer's closing share price on Friday, the investors said in a statement.

The offer, if successful, would be a next step in CEO Helena Foulkes's everything-is-on-the-table approach to turning Hudson's Bay around. The company has already divested flash-sale website Gilt, slashed costs by cutting jobs, unloaded a minority stake to Rhone Capital, and sold its iconic Lord & Taylor flagship building in Manhattan to WeWork for $850 million. But it's been to no avail--through last week's close, the stock since 2012 had lost almost two thirds of its value.

On Monday, news of the offer drove the shares up 44% to $6.93 by early afternoon.

Going private will give Hudson's Bay more flexibility to try new ideas as the company refocuses on North America, said Poonam Goyal, an analyst at Bloomberg Intelligence.

"The retail sector is undergoing massive transformations, and maybe they just need the flexibility," Goyal said.

The company’s work to do includes jettisoning the Lord & Taylor fashion clothing chain and overhauling its declining network of Hudson's Bay stores in Canada, according to Bruce Winder, co-founder & partner at the Retail Advisors Network in Toronto. It should also invest heavily in its Saks Fifth Avenue chain, since that's "where the action is," Winder told BNN Bloomberg Television.

"To do this kind of drastic surgery, you really need to do it in private because markets will go crazy, your stock price will fall,'' Winder said. "Look at Nordstrom last year, they tried to make a play to go private as well. We all know the department store sector is suffering considerably and it's in decline.''

Leaving Germany

In a related announcement, Hudson's Bay said it is cashing out of its European operations--to the tune of $1.13 billion. The Toronto-based company said it reached an agreement for partner Signa Holding GmBH to take over the companies' German real estate and retail joint venture, which includes Galeria Kaufhof, the country’s largest department store group, and the retail chain Karstadt. Part of the proceeds will be used to strengthen the company's balance sheet by paying down a term loan.

HBC’s bid to go private is dependent on the deal with Signa, which is expected to close this fall. The shareholder deal would allow Baker and his partners to continue the company's turnaround efforts outside the glare of public markets.

"We believe that improving HBC's performance will require 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," Baker said in a statement Monday.

Special committee

Hudson's Bay said no decision has been made on Baker's bid, and the retailer has formed a special committee to review the proposal with the assistance of outside advisers.

This isn't the first time shareholders have tried to get involved. Activist investor Land & Buildings Investment Management last year pushed the company to explore ways to improve value for shareholders, such as calling for Hudson's Bay's insiders to explore taking the company private. The New York hedge fund, run by Jonathan Litt, also called for the company to sell its European division and other real estate.

Land & Buildings still owns a sizable position in Hudson's Bay, according to people familiar with the matter. While the hedge fund is evaluating the terms of the transaction, initial impressions are the proposed price undervalues the company, the people said.

A representative for Land & Buildings declined to comment.

Getting approval

The transaction would be subject to approval of the majority of remaining shareholders outside the group--or a majority of the minority holders, according to other people with knowledge of the matter who asked not to be identified discussing private information.

The deal's timing was sparked by investor frustration over how public markets have failed to recognize steps Hudson's Bay has taken over the past 18 months to improve shareholder value, the people said. These moves include the sale of Gilt, shutting down the Home Outfitters home decor chain, and the sale of other real estate assets.

By taking the company private, investors will be able to continue necessary steps to improve its operations outside of the gaze of the public market, they said.

Other retailers--most notably Nordstrom Inc.--have failed in their bids to go private in recent years. But the investor group believes the Hudson's Bay transaction has a better chance of being completed because the equity group is committed to the deal and the premium being paid should appeal to minority holders, the people said.

Its ultimate success is contingent on the level of cash and liquidity, which will come with the closing of the parallel European deal, the people noted, adding the investor group doesn't plan to drastically change the trajectory of the company's current plans.

In terms of operations, more changes are likely. The sale of the German business to Signa doesn't include operations in the Netherlands, which will revert to Hudson's Bay ownership. Hudson's Bay said it's reviewing options for the Netherlands business, "which has not performed to expectations." In the meantime, the company expects to cut costs by measures that include closing stores.

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