Saks Investors Make Out Like Inept Bandits

For a company that is putting up solid sales growth, has a great brand, and has seen its stock price rise more than 40% in the last 12 months, Saks (UNKNOWN: SKS.DL  ) didn't demand much of a premium. Hudson's Bay, the operator behind Lord & Taylor, picked up Saks for just $16 per share, representing a 4.5% bump to Friday's closing price.

Why is this good news?
It seems like an odd move from Saks' point of view. Hudson's Bay posted a loss in its last quarter, while Saks put up a nice profit in its most recent period. Hudson's Bay also has almost no cash on hand to finance the transaction. The business had about $27 million in cash at its last reporting in May, and it's going to finance the acquisition with equity, debt, and secured notes.

You know what, speaking of the word "acquisition," let's call this what it really is -- a merger. Saks has a larger market capitalization, and while Hudson's Bay runs substantially more locations, it only barely edged out Saks in total revenue last quarter.

Management on both sides was eager to spin the big win for Saks shareholders. The closing price represented an "approximate 30% premium to the May 20, 2013 closing price, the day before media speculation began." So really, Hudson's Bay was making Saks an offer it would have been crazy to refuse.

Never mind that Saks put up a 5.9% increase in year-over-year comparable sales last quarter, or that its operating income margin was 8.6% in the same quarter. Surely the business will find some great inspiration from Hudson's Bay, which managed a 4% increase in comparable sales -- with Lord & Taylor experiencing a 1.4% decline -- and a loss at the operational level. Maybe some of that difference is that Saks is managing $436 of annual revenue per square foot, while Hudson's Bay's combined brands are running under $200.

So why is this good news?
The benefit for Saks is, actually, that Lord & Taylor isn't as good. Saks is still managing some stores in those malls that no one goes to anymore -- you know, the 90% hat stores mall that still has that cookie place -- and it's expensive to break out of all the leases and shut the places down. Now, it can swap out a lower-end store with a fancy name for the Saks locations, taking less of a hit on the revenue and cost sides.

The combined company could also create a real estate investment trust, using the flagship locations under its umbrella. Saks' New York City flagship alone is valued at more than $800 million. So there's plenty of room for investors to be hopeful about new real estate opportunities.

But what I think is the best bit of news is that Saks gets 40 days to seek better bids. If I were running the place, it would be selling chocolate and board games -- oh, and I'd go look for a better company to join up with. Hudson's Bay may be the best offer out there right now, but it's simply uninspiring. Saks management can -- and should -- do better.

Saks isn't the only retailer on the cusp of a big change. In fact, the entire retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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