Hudson's Bay's bid for Macy's stumbles, say sources

Hudson's Bay Co., ownerof the Lord & Taylor and Saks Fifth Avenue retail chains, hasyet to line up equity financing for a bid for Macy's Inc.,over a month after approaching its U.S. peer, people familiarwith the matter told Reuters.

Hudson's Bay's challenges in putting together a firm offerare a blow to the ambitions of its majority owner and executive chairman Richard Baker, who built a retail empire relying onreal estate financing as much as his knowledge of the retailsector.

Macy's is skeptical that Hudson's Bay can raise thenecessary financing for its bid, and it is not currently engagedin any negotiations about a possible deal, the sources said thisweek.

To mount a credible offer for Macy's, which has a marketcapitalization of close to $10 billion US, Baker has been seekingto raise equity and debt financing for Hudson's Bay, which has amarket value of $2.2 billion, the sources said.

However, Hudson's Bay's existing equity partners, includingmall operator Simon Property Group Inc, have beenreluctant to back Hudson's Bay's bid for Macy's, which wouldrequire them to invest more money in mall real estate, even asconsumers continue to abandon them in favor of internetshopping, the sources added.

While Hudson's Bay has told potential partners it has thebacking of at least one wealthy family willing to help financeits bid for Macy's, it has not yet found a major institutional investor to serve as an equity partner, the sources said.

Although Hudson's Bay is still trying to put together a bid,it may decide to pursue another acquisition target, or put atakeover effort on hold, the sources cautioned.

The sources asked not to be identified because thedeliberations are confidential. Macy's, Hudson's Bay and SimonProperty Group all declined to comment.

Macy's shares were down 2.4 per cent at $32.49 US in New York onFriday morning, while Hudson's Bay fell 2.1 per cent at $11.99in Toronto.

Reluctant to part with trophy assets

Hudson's Bay has been successful over the years inattracting major property investors, such as RioCan Real EstateInvestment Trust, in joint ventures that have allowedit to place more debt on its retail assets and seek to juice returns from rent and the value of the real estate.

However, the setback with Macy's illustrates the limits of financial engineering. Retailers with a reliance on malls acrossthe United States, including Macy's, Sears Holdings Corp.and J.C. Penney Co. Inc., have suffered asshopper traffic in several malls has declined.

As a result, the underlying real estate of these mall-baseddepartment stores are less financially attractive to theinvestors that Hudson's Bay has traditionally relied on to helpextract cash from its properties or raise financing foracquisitions.

Macy's has been reluctant to tap into the real estate ofsome of its trophy assets, such as its Herald Square departmentstore in New York, the location for the Christmas movie "Miracleon 34th Street."

This is because it views the rent from sale leasebacks inwhich it sells its real estate only to lease it back as anotherform of debt.

Under pressure from activist hedge fund Starboard Value LP,Macy's has made some small moves to monetize its real estate,estimated to be worth $21 billion US.

They include a joint venture with real estate investmentfirm Brookfield Asset Management Inc for roughly 50Macy's locations.

Macy's in transition

Macy's, which also owns luxury chain Bloomingdale's, is in aperiod of transition as CEO Terry Lundgrenis due to become executive chairman on March 23. He will besucceeded by Jeff Gennette, the president.

Both Hudson's Bay and Macy's have recently reporteddisappointing sales. Hudson's Bay said last week that consolidated comparable sales decreased by 1.2 per cent on aconstant currency basis in the three months to Jan. 28. Macy'sreported a 3.5 per cent drop in comparable sales in the fourthquarter.

Nevertheless, Macy's remains profitable, reporting netincome of $611 million US in the 12 months to Jan. 28, down from$1.07 billion US a year earlier.

Hudson's Bay, on the other hand, reported a net loss of$364 million in the first nine months of 2016, compared to netearnings of $17 million a year earlier.

Shares of both Hudson's Bay and Macy's have both lost aboutone-quarter of their values in the last 12 months as investorsfretted over their prospects.

Hudson's Bay has accumulated nearly $4.5 billion US in debt,including its share of the roughly $2 billion US in loans held by ajoint venture with Simon Property. Macy's has long-term debt of$6.6 billion US.