Three months ago, Macy's (M +1.73%) shares flew higher in response to a buyout offer for $21 per share (or $5.8 billion) from private equity firms Arkhouse Management and asset manager Brigade Capital Management. Over the weekend, these would-be buyers raised their bid for Macy's to $24 a share ($6.6 billion) -- and Macy's stock is going up again -- 15.6% through 10:35 a.m. ET.
NYSE: M
Key Data Points
The Macy's buyout offer
Macy's informed investors of the new and improved proposal Sunday evening. Although companies aren't often enthusiastic about hostile takeovers, management said that its board of directors "is open-minded" about this one and "will carefully review and evaluate the latest proposal" before deciding whether to endorse it.
But that's it. Management didn't say which way they are leaning and does "not intend to comment further on [this] unsolicited non-binding proposal until the Board has completed its review."
So I will.
Today's run-up in share price already puts this retail stock close to Arkhouse/Brigade's earlier (and rejected) $21 per-share offer price, which valued the stock at 47.5 times trailing earnings -- which sounds pretty generous. The new offer -- 14% higher than the old -- therefore values Macy's stock at more than 54 times earnings, which seems even more generous.
From this perspective, it would appear that Macy's best course of action is to take the money and run.
Is this a fair price for Macy's?
Looks can be deceiving. The main reason Macy's stock looks so expensive today -- and Arkhouse/Brigade's offer so generous -- is because Macy's took a $1 billion charge to earnings for asset write-downs last year, a fact that S&P Global Market Intelligence data make clear. Assuming that charge was truly one-time in nature and earnings bounce back this year (and analysts think they will), it's perhaps fairer to value Macy's stock on forward earnings, rather than trailing earnings.
By that measure, the stock trades for a cheap 6.2 times earnings today. Looking at from this perspective, Arkhouse and Brigade are only offering to pay about 7.1 times forward earnings for Macy's. And that valuation doesn't look generous at all.
Considering that Macy's stock currently pays a dividend yield of 3.9% and is expected to grow earnings nearly 10% next year, I suspect the company is better off rejecting this buyout and proceeding on its own. I suspect investors are better off sticking with Macy's a while longer, rather than cashing out for a short-term gain.
