U.S. hedge fund Land & Buildings is pushing Richard Baker to up his offer to take Hudson’s Bay Co. private.
Baker, executive chairman of the Canadian department store company, on June 10 submitted a $1.31 billion all-cash, go-private deal. He was joined by other shareholders that include Rhône Capital LLC, WeWork Property Advisors, Hanover Investments (Luxembourg) S.A. and Abrams Capital Management LP. Collectively, they own 57 percent of the outstanding shares of HBC. The per-share offer at 9.45 Canadian dollars ($7.50) pegs the deal at 1.74 billion Canadian dollars, or $1.31 billion.
Baker’s offer noted the pending sale of HBC’s 50 percent interest in its European business, as well as the sale of certain real estate assets. And that’s where Jonathan Litt, who heads up Land & Buildings, has an issue with the proposed transaction.
According to the activist investor, who sent a letter Tuesday to HBC’s special committee of independent directors, the current offer is “woefully inadequate” because it “undervalues the exceptional assets the company owns.”
Litt noted comments by HBC chief executive officer Helena Foulkes in the company’s most recent earnings announcement last week about completing “real estate transactions at near or better than our estimated equity values” and back in September when she stated that real estate owned by the company was worth “28 a share” in Canadian dollars ($21).
Litt also took issue with a component of Baker’s offer that’s connected to the sale of the company’s 50 percent interest in its European business. Instead of applying just a portion of the proceeds to fund the offer, the activist investor suggested that the excess amount from the deal should go toward the offer and not be used as a distribution to the buyout group. Doing it Litt’s way would boost the offer to 18 a share in Canadian dollars ($13.50). He’s also asking the special committee to hire an independent investment bank to evaluate the value of HBC’s real estate and retail operations.
Cowen & Co.’s luxury retail analyst Oliver Chen said that the proposed Baker offer at 9.45 a share Canadian dollars ($7.50) is at a “considerable stock premium,” but noted that it possibly could be considered modest based on a sum of the parts analysis that includes “significant underlying real estate value.” Using a valuation of 5.2 billion in Canadian dollars ($3.9 billion), plus a 40 percent to 60 percent discount for valuation illiquidity or decline in value for assets that haven’t been valued in year, Chen has a real estate value of 2.6 billion Canadian dollars ($1.9 billion). That plus the retail operations has him pegging the per-share equity value of HBC at a mid-point range of 12.40 Canadian dollars ($9.30).
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Of course, as an activist shareholder, Litt’s job is to agitate management and try to get companies to rethink operations under the guise of getting better value for shareholders. In reality, that’s about pushing to sell assets, whether its certain operations, other tangible assets such as real estate, or even the entire company itself.
It’s a tactic that begs the question of what’s really in the company’s best interests.
The push to sell assets often doesn’t mesh well with management’s long-term goals for a company’s business plan. For example, selling a real estate asset now might provide a certain return to shareholders, but it also translates to one less asset that the company has to sell later on to preserve some liquidity on the books when the economy takes a turn for the worse. For a retailer, an economic downturn could mean slower sales as consumers pull back on spending, and the lower revenues that come in could impact the company’s ability to borrow.
Litt has been the proverbial thorn in Baker’s side. Last November, he sent a letter to HBC shareholders indicating that he thought HBC stock is “egregiously undervalued” and that the company should be pursuing to unlock shareholder value. At the time, he was pushing for the sale of three business operations–Saks Fifth Avenue, the remaining 50 percent interest in its European business, and Lord & Taylor–and the pursuit of real estate investment trust status for HBC due to its Canadian real estate holdings.
And while he’s pushed HBC to unlock the value of HBC’s real estate, the company did close on the sale of its Lord & Taylor flagship on Fifth Avenue in Manhattan in February to WeWorks for $850 million.
In addition to selling its interest in its European business, HBC said last month that it is exploring strategic alternatives for its Lord & Taylor business, which could include a sale of the operation. For now, HBC is looking at Saks Fifth Avenue, Saks OFF 5th and the Hudson’s Bay department stores as its core business operations.
A spokesman for HBC did not respond to a request for comment.