The retail apocalypse continues to claim victims, with Barneys New York becoming the latest department store chain to file for bankruptcy earlier this week. That might have made the recent offer by a group of major Hudson's Bay (OTC:HBAYF) shareholders to take the struggling department store conglomerate private seem especially appealing.
However, despite the challenging retail environment, Hudson's Bay's board of directors made it clear last week that it won't sell the company at a bargain price. This could eventually lead to a better deal for shareholders -- or scuttle the go-private proposal altogether.
A cool reception for the proposed buyout
Hudson's Bay Chairman Richard Baker and several partners announced their offer to buy the rest of the company for 9.45 Canadian dollars ($7.12) per share in early June. In the two months since then, most of the company's big shareholders other than the ones participating in this offer have indicated that the proposed price is too low.
Investment funds Land and Buildings and Catalyst Capital have complained that Baker's group wants to gain control of the company without contributing a dime. (The plan calls for using the proceeds of Hudson's Bay's asset sales to buy out the minority shareholders.)
In order to reduce the likelihood of this buyout proposal being approved, Catalyst has offered to buy a substantial portion of Hudson's Bay's shares for CA$10.11 ($7.61) per share. That represents a meaningful premium to the buyout offer price, giving shareholders who want to cash out an opportunity to do so.
Canadian law requires the board of directors to seek a formal valuation of the company's shares before agreeing to a potential takeover. This valuation should be available by September. But it seems like the board members have already made up their minds. According to a company statement: "Based on initial analysis completed to date by its financial advisor and other factors, the Special Committee has communicated to the Shareholder Group that the price of [CA]$9.45 per common share offered in the Shareholder Group Proposal is inadequate."
In conjunction with the buyout proposal, Baker's group -- which controls a majority of Hudson's Bay's outstanding shares -- stated that it would not support any attempt to sell the company to a third party or return asset sale proceeds to shareholders via dividends or buybacks. The buyout group essentially gave minority shareholders an ultimatum: Either take the CA$9.45 ($7.12) offer or patiently wait for Hudson's Bay's turnaround plan to pay off (or fail).
It doesn't seem likely that the buyout group will change this stance. However, it is possible that the group will increase its offer in order to seal a deal. After all, Hudson's Bay's real estate is worth considerably more than the company's current enterprise value, by most estimates. Thus, Baker and his partners could pay a higher price while retaining plenty of upside potential.
On the other hand, Hudson's Bay has continued to lose money in recent quarters and could incur huge costs to reverse its aggressive and poorly conceived expansion into the Netherlands. As a result, Baker and the shareholders involved in the buyout offer could just as easily decide that it's too risky to offer a higher price.
Hudson's Bay has a credible turnaround strategy
The good news for Hudson's Bay shareholders is that CEO Helena Foulkes has made tremendous progress toward stemming the company's losses in just a year and a half as CEO. In that short period of time, she has sold the money-losing Gilt flash-sale site and Hudson's Bay's German operations (which are also unprofitable). Foulkes has also initiated plans to shutter the company's Home Outfitters unit and downsize the Lord & Taylor and Saks OFF 5TH chains. All three of those concepts have struggled in recent years.
These moves will refocus the company on its two strongest retail concepts: Saks Fifth Avenue and Hudson's Bay. Those two chains -- and a scaled-back Saks OFF 5TH -- should be able to earn sustainable profits. Meanwhile, Hudson's Bay should be able to eliminate virtually all of its debt by selling its noncore real estate.
Patient investors could benefit from improved business results over the next year or two, due to Foulkes' restructuring moves. Thus, while Hudson's Bay stock might fall initially if the buyout offer is rescinded, holding the stock could be better in the long run than selling at the prices currently proposed.