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Can Starboard Convince Macy’s to Strike Real-Estate Deal for Herald Square Store?

A major Macy’s investor wants the department-store chain to unlock the value of its real-estate portfolio for shareholders.

Starboard Value said Monday that while it appreciates the $400 million cost-cutting initiative announced last week, the New York-based investment firm believes that Macy’s real-estate assets are worth $21 billion and has suggested that the retailer create two separate joint ventures (JVs) to tap into this.

One would comprise its most iconic stores, including the Herald Square flagship in New York, Union Square in San Francisco, Chicago’s State Street store and one in downtown Minneapolis. The other JV would hold mall-based locations and the retailer’s owned distribution centers.

Starboard said that by implementing this structure, Macy’s stock will be worth $70 per share—almost double its current market price. Shares plunged nearly 47 percent last year.

In a letter to Terry Lundgren, Macy’s chief executive, and Karen Hoguet, chief financial officer, Starboard Value CEO Jeffrey Smith said, “We believe that a JV, or series of JVs, can crystallize the value of Macy’s real estate while bringing in a partner with substantial capital and real estate expertise that will enable the JVs to grow and diversify their real estate holdings.”

He continued, “When matched with an operational turnaround plan that includes hundreds of millions in cost reductions and margin improvement, we believe Macy’s is an extremely attractive investment.”

The comments came after Macy’s reported a 4.7% drop in same-store sales on an owned-plus-licensed basis during November and December combined, attributing 80 percent of this decline to weak sales of cold-weather goods, and announced plans to cut more than 4,500 jobs.

The company also revealed last week that it had enlisted Eastdil Secured, Credit Suisse and Goldman Sachs to help it pursue partnerships or JVs for its mall-based properties as well as flagship real-estate assets.

In a statement, Macy’s said, “The viewpoint expressed by Starboard is consistent with actions already under way.”

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It’s not the first time that Starboard has put pressure on Macy’s to form a JV in order to improve its share price. Speaking at a Delivering Alpha conference in New York last July, Smith said that a real-estate investment trust (REIT) sale-leaseback transaction could boost its stock by more than 70 percent, but industry experts were skeptical.

“You can only make that move once and even though the cash flow and investor benefits can be rewarding in the short term, you are separating a very valuable leverage point from the retail operation,” retail consultant Mark Heckman said at the time.