Would a Macy's Buyout Be a Miracle on 34th Street?

In this podcast, Motley Fool analyst Jason Moser and host Deidre Woollard discuss:

• The potential for Macy's going private.
• If department stores are going the way of the dodo.
• What could change the regulatory climate for big deals.

Motley Fool host Ricky Mulvey and contributor Matt Frankel dive into Boston Omaha, a company that could be poised to be the next great conglomerate.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Dec. 11, 2023.

Deidre Woollard: Is it time for a miracle on 34th Street? Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool Analyst, Jason Moser. Jason, how was your weekend?

Jason Moser: It was a good weekend, Deidre. How about yours?

Deidre Woollard: Pretty good. Every Sunday though, I start looking at the laptop, I start wondering what the news is. Last few Sundays have been pretty good for me as a news junkie and did not disappoint this weekend. The hot rumor, the rumor that is dominating the stock market today too, is that Macy's might be acquired and taken private for $5.8 billion. This is with a couple of private equity funds, including Arkhouse management and Brigade Capital Management. The deal would be for premium of 32% for shareholders based on when the deal was brought up at the end of November, stock has been battered around for a bit. That is a premium based on where we were, but from where the stock has been over time, but then today the stock has been up practically to the level of $21 a share. Is this a deal that shareholders should want?

Jason Moser: If I were a shareholder, which I'm not. But if I were, I would think so. Yes. We've talked about Macy's, I think for a number of years on these shows, we've always just come back to the same ultimate conclusion. It's a business that just remains challenged because maybe it's not really necessarily a Macy's world anymore. I think Ron Gross years back, asked the question, does the world really need JCPenney? When we were talking about JCPenney's woes. I feel that question more or less applies here to at least to a degree. Macy's has more or less been treading water here over the last several years, trying to figure out the most sensible path forward. I mean, when you look at the metrics, the numbers, it really does tell you a tale of a challenge business. You go back to 2014, a helped up revenue just under $28 billion. Today that's $23 billion. The margin picture just continues to get incrementally worse. Very concerning to me, cash and short term investments. Going back 10 years, it stood at 2.3 billion dollar today, $364 million. That is a massive cash burn and the stock is down 60% over that stretch. That's what the share account being down 25% as well. They bought back shares, brought that share account down. In theory, it's supposed to have the opposite impact. But this really goes back to just what we've been talking about Macy's. It's just a business that's living in a different retail world. I'm not necessarily certain the world needs it. Maybe it does, but if I'm a shareholder of Macy's today, I'm feeling pretty good about this offer and hoping that it goes through.

Deidre Woollard: That is a question I'm asking myself too is, do we still need department stores? I think we'll get into that in a little bit. I wanted to talk first about why this deal, and I feel like part of it is, it's the real estate and a lot of that is that Herald Square location, the famous big Macy's. Everyone knows the big Macy's. In 2021, they announced this plan to redevelop it. They've got a whole website dedicated to it. They're going to put this giant 900 foot office building on top of and in 2021, the office buildings. But real estate is part of the play here. What do you think? We saw the Lord and Taylor building in New York become this beautiful workspace for Amazon. But what do you think the odds are of Macy's eventually becoming a skyscraper here?

Jason Moser: It reminds me a bit of the Sears thesis back in the day. Sears was really kind of going through the same process in the general thesis, therefore investors was the real estate. I think that certainly something that comes into play here may be the back of the envelope valuations. You've got Macy's real estate value anywhere from $6 billion to potentially $8 billion or more. There's an asset there that certainly could be exploited. But Macy's is a retailer. They're not a real estate company per se. It's hard to imagine how all of the real estate would be used. I'm sure it ultimately would vary by location. I'm not sure office space is the most obvious option in every case, but depending on certain locations, it absolutely could be a part of it. We are seeing slowly but surely offices haven't completely gone the way the Dodo bird yet. But there are other use cases like fulfillment and distribution. I'm talking about converting some of these types of locations into more residential use cases. Whether that schools or apartments, or condos or whatever. I think ultimately that's the attraction with such a real estate portfolio is there a lot of different ways they could go with it. I think that goes back to the fact that really when we're looking at Macy's as a company, they're not the company. This really isn't the leadership team that would be able to exploit the value in that real estate portfolio as much as say, the acquirers that are certainly more real estate-focused.

Deidre Woollard: Absolutely. Interesting that you brought up Sears because thinking about what they tried to do we had Seritage the spin off of all of the properties, they were going to develop that they got whacked during the pandemic. They couldn't build things fast enough to really satisfy the debt there. Now they're just basically, they're just winding down in that at they're just selling everything off. The problem with having the development be part of the thesis is you just never know what those external factors are going to be.

Jason Moser: Exactly.

Deidre Woollard: I think it's interesting you mentioned the leadership, because Macy's is right about in the midst of this leadership transition. Jeff Janette, he's been there, he's been with the company for over 20 years, I think. But he's been in the CEO seat since 2017. You've got this new CEO, Tony Spring stepping, and this has been that long transition. We've known about this one for a while. They've talked a lot about the ways that they're pivoting. Getting away from being that anchor location. They're trying out smaller stores and they've been talking on the last couple of earnings calls, they're seeing great success with this. Better sales per square foot and things like that. If this gets taken over, it sounds it's going to be a whole different strategy. It's hard to know because we won't get the earnings calls, we won't be privy to it. But it seems like it would be a strategy shift.

Jason Moser: I think it would have to be. Macy's was born in a different time when retailers just in a very different place. Malls aren't necessarily this massive growth opportunity that they once were. Retailers across the board focusing now more on omni channel, lighter cost structures, being able to do more with less as we as consumers just have a number of different ways we can ultimately get our stuff. There's definitely something to the brand. There's some brand equity here that matters. Ultimately is this just something where Macy's continues to exist, just in a smaller form? I think that's most likely the case. But new leadership is going to have their work on their form.

Deidre Woollard: Well, it's interesting too because you talked about JCPenney and I've been watching the different swings they've been taking. First they thought they were going to really aim at busy suburban moms. They came up with this Athleisure line. They said that's our core customer. Now they've gone more back toward their roots and being value and trying to make that work. I think with Macy's, it's interesting because they're still primarily a department store. They've got a good online experience, but there's so much competition there. You've got the rewards membership, they've got a really good rewards program, it drives around 72% of their sales at this point. They're doing some store in store stuff with Toys R Us. It seems they're trying a lot of things. But the core question is, do we still need department stores?

Jason Moser: I think that that is the core question. You make a good point there in regard to their Star Boards program is somewhere in the neighborhood, 35 or so million members give or take the day. Like you said, they drive such a majority of sales. That does matter. They do have some brand loyalty there, but the department store just doesn't carry the same weight as it once did. We talk about places like Target and Walmart that are becoming those everything stores. You've got obviously Amazon, which ultimately is the everything in store. But think about Amazon, Target, and Walmart. What's one thing all three of those concepts have in common that Macy's, to my knowledge does not, grocery. You can go get virtually anything you want, including groceries at all of these different retailers now. For something like a Macy's, you're going there with intent. You may be going there just to shop around and find something. You may not even know what it is, but you're going there with some intent. We've definitely seen concepts like Target and others benefit from the store, with a store concept Dick Sporting Goods, same thing. Opening those Ultas or those Under Armour, Nike stores within in their stores. JCPenney tried it to an extent with Sephora as well. Listen man, I think the easy solution here, Macy's links up with Trader Joe's. You open up Trader Joe's within the Macy's store, and problem solved.

Deidre Woollard: I like that. JCPenney tried with Sephora and they've lost that deal and now Kohl's has it. The Sephora stores have been basically holding Kohl's up at this point. They're putting Sephora anywhere they can at this point.

Jason Moser: Cosmetics are just a phenomenal business. We've seen it with Ulta too. Ulta has really rebounded from the challenges over the past few years. Cosmetics and beauty, just a resilient, very attractive part in the bond. A very attractive market, very difficult to disrupt.

Deidre Woollard: I want to talk about one more sort of acquisition that wasn't, we were following this last week. Potentially a huge mega deal between Cigna and Humana would have been this massive deal in the healthcare space went from being a rumor and then over the weekend Cigna said, we're doing a buyback of $10 billion instead. They didn't reference the deal, but definitely the message was like, hey, we have a better place to put our money. The market up Cigna has been up on the news. What killed the deal? Do you think it was the fear of the fact that it never would have gone through?

Jason Moser: I have to believe that they were batting that around to me. I mean, this would have been a field day for regulators. This would have absolutely been put through the ringer. I'm not saying it couldn't have happened, but maybe the line is that it was price. The companies couldn't agree on price and so just amicably part ways and I'm sure there was something to that as well. But I think that they just ultimately maybe saw the deck stacked against them, all things considered and said, now is not the time. I will say this understanding today that they say they couldn't agree on price. I think you and I and probably everybody else under the sun knows that this would have been just field they for regulators as well. I wouldn't be shocked. Not saying this will happen, but I wouldn't be shocked to at least see this deal back on the table in some form or another, depending on the outcome of next year's election. That's just something to keep in mind. 2024 is going to be probably a crazy year on the political side. Who knows how things are going to shake out. But we do know that the current administration is keeping a very close eye on big deals like this. If the White House switches over next year, that perspective could change. If it does, then maybe you see companies feeling the landscape for consolidation is a little bit more friendly and they start to entertain deals like this. It's just something to keep in mind.

Deidre Woollard: It may not even need to be a shift in leadership. It may just be that the tide shifts already. We've already seen some deals that we thought wouldn't go through actually go through. So it may end up being that you don't need that shift in order for things to change.

Jason Moser: Maybe not. Ultimately you want deals like this to prove value. But you have be careful. There are plenty of examples out there where the big get bigger, and ultimately they get so big that it really starts to limit the options for consumers, and that's what we don't want.

Deidre Woollard: Cigna has talked a little bit too, or there have been stories about potential smaller acquisitions and little tuck-ins and bolt on. So you never know what could happen in terms of maybe Humana spins off something or some part of it ends up being in there. So it doesn't have to be the full thing in order for these companies to keep talking.

Jason Moser: Exactly. If Microsoft and Activision Blizzard figured out a way to make it work. I think anything's possible at this point.

Deidre Woollard: Well, I want to ask a related question about that. Thinking about stock buybacks, we want to see a stock buyback when shares are cheap. Cigna saw 10 billion, they said they're going to buy back five billion before the middle of 2024. So they put a relatively short time line on it. It's cheap now, but it's not super cheap. And certainly today it's not as cheap because it's [laughs] gone up on the news. But is this buyback a signal that they don't see anything else worth spending capital on and do you want them to buy back no matter what, even if the shares maybe aren't as cheap as they were?

Jason Moser: I'm sure employees of the business could probably make a case for some of that capital being diverted to them. I think that's always something that I think is worth entertaining for these businesses, particularly as they get larger. But with that said, to your point on valuation on the shares. They're down around 10% year to date, 15 times earnings, around two times book value, seven times free cash flow. It's absolutely not an expensive-looking stock, and this is a company with a long history of repurchasing shares. Share counts down over 23%. Over the last five years alone, they've spent $22 billion on repurchases since then. So this is not their first rodeo, so to speak. So I think this is something you get with a business like this. They are looking for ways to return value to shareholders. Share repurchases are one of the ways they can do that. And at least the repurchases are having the intended effect. The share count down 23%. That's nothing to seize at.

Deidre Woollard: We've talked about two deals that weren't. Do you think there's going to be one or two more big deals before the year ends?

Jason Moser: Honestly deal that I'm following, which is just to me a fascinating soap opera, is this entire PGA Live Tour thing. Bringing in this new consortium of sports owners who are trying to figure out their way to participate in this along with Pith and the Saudis. And they set the target for December 31st. Well that's not something that should have a big impact on public markets. It could have second-order implications on the content that we're getting and whatnot. So that's the one I'm really keeping my eye on.

Deidre Woollard: How awesome we'll have to talk to you after the year ends to figure out what happened next with that one.

Jason Moser: You got it.

Deidre Woollard: Thanks for the time today, Jason.

Jason Moser: Thank you.

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Deidre Woollard: Boston Omaha welcomes comparisons to Berkshire Hathaway. Has the company earned that swagger? Matt Frankel and Ricky Mulvey they explore the potential of this conglomerate in the making.

Ricky Mulvey: So Matt, Boston Omaha has its arms in a number of different businesses. It can be a little bit of a difficult business to understand. Can you do the quick introduction?

Matt Frankel: It's an interesting company because Boston Omaha itself doesn't really do a whole lot. It's a holding company. In the sense that Berkshire Hathaway is a holding company. It doesn't really have much of its own businesses, but owns a lot of other things. So there's four main parts of Boston Omaha's business. It has its billboard rental business, which is called Link Media. It's pretty widespread in the Midwest area. If you're ever driving through Omaha itself, you'll see a bunch of link billboards. They have an insurance business called General Indemnity which sells surety bonds. They have a fiber-to-the-home broadband business, which goes under a few different brand names depending on where it's located. And they also have Boston Omaha asset management, which is a collection of other assets the company owns. It owns a minority stake in a few businesses. It owns as the name implies an asset manager, and it owns a few other little interesting investments that it bundled into one division.

Ricky Mulvey: Let's focus on the asset management business. I think that's where at least I have some confusion. It has major projects and build-to-rent housing, broadband Internet, but it also has a lot of exposure in commercial real estate. I think that may be something that investors are reacting to right now. If you look at the website, it does say it has office investments, but I have trouble finding the story beyond that. So what's the commercial real estate story for Boston Omaha right now?

Matt Frankel: They owned a minority stake in an investment manager called 24th Street Asset Management and recently acquired the rest of it. They acquired the whole thing. It's included in Boston Omaha asset management. Now they had minority exposure, now they have direct exposure. 24 Street asset management operates to closed end funds today. As you mentioned, there is some office exposure. It's not a ton. Are the investments a concern? We don't really know the details. It's been a private business till now, so they don't have to report what the funds are doing to anybody. There's a lot that we don't know about it, which I think is more than the office performance itself. I think the fact that we really don't know a whole lot about their commercial real estate dealings so far, is giving investors concern.

Ricky Mulvey: It goes back to, what's the old saying? I'm not mad because of what you did, I'm mad because you didn't tell me.

Matt Frankel: Right. There's a lot of that with Boston Omaha. I'm sure we'll talk about this a little more, but they don't communicate very well with investors. They don't host earnings calls, they don't do things like that, and I think that plays a lot into the stock performance. They're trying to be very Buffetesque, which I get, [LAUGHTER] but it doesn't seem to be working.

Ricky Mulvey: We'll get to that. We're in a little bit of a negative place, and they don't communicate well, they have unknown commercial real estate exposure, but I know you're a Boston Omaha bull, so what's your long term thesis then for Boston Omaha?

Matt Frankel: For me, the asset management business is the big potential area. I like the billboard business. The billboard business and broadband businesses especially have fantastic economics. Their broadband business. They're doing fiber to the home broadband, so it's essentially a one time capital outlay and then it's a great cash flow generator, so that business can have 90% gross margins over time. Those are three great businesses that they participate in. The asset management business is really the X factor here. They own a stake in a company called Sky Harbor. That's the biggest investment the company has made to date. But the real potential is what they're trying to do in built for rent housing and broadband, which you alluded to earlier in the sense that they're trying to raise outside capital to invest. This can be a home run source of revenue if things go correctly. It's a big if. But for example, let's say you raise $100, million from outside investors to invest in built for rent housing, you end up doubling that over a period of five years. If you agree to get, say 10 percent of any investment profits, that's a $10 million windfall that you didn't have to put up any of your own capital or assets for. Now, imagine if you're doing that over time with $1 billion of investor money, your $10 billion of investor money like some of the bigger players do. If you establish a track record in asset management, that's where the real X factor lies because it's really asset capital, and then all the other businesses can generate capital to help grow that side of the business because they do want to invest alongside all of their outside investors.

Ricky Mulvey: Right now the biggest revenue driver is the billboard business, but the key part with the asset management that I do give them props for is that they invest a lot of their own money alongside the folks who are in those funds.

Matt Frankel: That's a big part of their thesis, is that they want to benefit when their investors do well, but also to share if their investors go down, a lot of skin in the game, which we really like to see here.

Ricky Mulvey: Right now the company is in a little bit of an interesting spot especially as a asset management business, a collection of businesses because the price is trading below its book value, which is just the accounting value of its assets minus its liabilities. We'll get back to Boston Omaha in a sec, but why is it significant, in general, for any business, especially one like this to trade below its book value?

Matt Frankel: One, book value doesn't do a great job of valuing a business like this. I mentioned Berkshire. Berkshire has said that book value is garbage right now. It used to base its buyback plan off book value, and it doesn't use that anymore, for example, but it usually underestimates the company's value. For a company like this to be trading below its book value, it's odd. Boston Omaha hasn't traded below book value as a public company, even during the initial COVID crash, it never got below its book value. I'm shaking my head a little bit on this as well. A lot of it's that the market doesn't know how to value it, a lot of it's because the market doesn't know about its office assets and things like that like you mentioned. It's a rare case because the stocks have been drawn down about 50% this year while the market's done well, so I'm shaking my head a bit.

Ricky Mulvey: I know you've written about this a couple of times where, what is it? There's two Wall Street analysts who follow this company, so maybe it's tough to tell what investors are discounting about it. I have to think there's something beyond just it being in the two hard pile in potentially a little bit of office real estate.

Matt Frankel: A lot of people do put it in the two hard pile. It's a very long term focused investment to an extreme case. A lot of companies I invest in say, Bank of America, that's definitely a long-term investment, but in the meantime, they pay me a dividend, they hold quarterly earnings calls, they make money, things like that. This is an extreme long term investment, which a lot of people don't really know how to value. I do think a lot of people put it in the two hard basket and I'm hoping they'll regret being wrong.

Ricky Mulvey: Right now while the market's been up, this company has taken a downturn in 2023. One move for these capital allocators. To be transparent, I own some shares in Boston Omaha, but it also has me shaking my head a bit, which is that they're issuing shares for cash right now. They're building up their cash reserve, and as the stock has gone down, they're issuing more and more shares to grow that cash pile. What's going on here? What's the capital allocation strategy that I don't understand?

Matt Frankel: To be fair, I'll push back a little bit on that. They haven't issued any new shares for the past two quarters. As the bulk of the 2023 drawdown has happened, they've stopped issuing shares. I spoke to a Alex Rozek, the CEO, recently, and he specifically said that's not a desirable way to raise capital right now. Credit where it's due. I wish they would do a buyback or a tender offer or something to put investors in the other direction who feel the same way you have because you're right, in the past, say year, they've done a lot more of selling shares for cash than buying back shares without any clear use for the money because at the time they sold shares, say in the first quarter, they already had something like $50 million in the bank, which for a sub $500 million company is a lot. Why? Did they think the stock was too expensive at that point? Which is where investors heads go. I don't think that was their rationale, and they addressed this at their annual meeting a little bit, but it does make you question why they're selling shares.

Ricky Mulvey: Especially, what was it? A year ago, what was it? I think the leaders said this, where it was like, we have simply too many opportunities.

Matt Frankel: That was the whole rationale behind launching Boston Omaha asset management, like the raising outside capital. They mentioned broadband specifically. They see $500 million of opportunities to attack, and they obviously can't do that with their own capital. Instead of raising $500 million by selling shares, raising outside capital to help invest in that is more desirable.

Ricky Mulvey: Speaking of investor communication, you mentioned you had a conversation with Co-CEO Alex Rozek, what did you learn?

Matt Frankel: Apparently instead of having earnings calls, they just talk to me for an hour or so. No, all jokes aside, I love that they're very approachable CEO's, even at their annual meeting. It's not like the Berkshire annual meeting. Anyone can walk up to the CEO's, and just have a conversation. It's very open communication in that sense. But like you said, the company does not host earnings calls. They generally don't talk to analysts, maybe me, but they really don't talk to analysts. They don't give commentary in their earnings reports. They issue quarterly earnings reports, but there's no like management quotes that are usually at the top of earnings reports. Alex even acknowledged to me that they need to do a better job of communication, but he doesn't really know what that should look like. How do you increase communication while still saying, don't worry about the quarterly numbers and things like that as much? It is a balancing act, but he agrees the market really doesn't know how to value the stock. Just to give you a fun example, I mentioned they own a lot of Sky Harbor. Sky Harbor makes up almost 30% of Boston, Omaha's market cap right now. There was a three day period a couple of weeks ago where Sky Harbor went up 40% and Boston Omaha stock didn't budge. It should have been up like 15% in that time because if Apple went up by 20 to 30%, Berkshire Hathaway stock would probably go up too because it own so much of it. It's just a head scratcher in a lot of ways because the market really doesn't seem to know what to do here.

Ricky Mulvey: To backtrack just a sec. Sky Harbor, they own private hangers for private jets going in and out at different airports.

Matt Frankel: Sky Harbor, to my knowledge, I don't know if you know any Ricky, but out of the big SPACs boom, I don't know any SPACs that are trading for more than their $10 initial price other than Sky Harbor. That's one of their few success stories.

Ricky Mulvey: I'd have to start Googling and that's terrible podcasting. I think I want to leave it with this question. Boston Omaha, really? I would say there is a welcome comparison to Berkshire Hathaway. They got Omaha in the name. There's the familial connection with Warren Buffett, but I don't know, do you think it's earned that swagger to not host quarterly earnings calls, not talk to analysts? Why not pre-announce your earnings date and make it a little bit easier for the investors trying to follow your company?

Matt Frankel: I would have to say no, they have not earned that type of swagger yet. With Berkshire it certainly makes sense. Buffett's mentality is, I've doubled the annualized returns of the S&P for over 50 years, shut up and trust the process. He's earned the right to say that. But even when the sky is falling, Buffett's out on CNBC, calming investors down. I feel you need to earn some track record to get to that point. It sounds like Alex agrees somewhat, he just doesn't really know what communication look at this point, and it feel like they're trying to be a little too Buffetesque at times.

Deidre Woollard: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.