Hudson’s Bay Co. could be nearing a deal to sell its Lord & Taylor operation, but an asset monetization strategy has become a sticking point for a key activist investor in the Canadian firm.
Richard Baker, executive chairman of the Canadian-based firm, is said to be working on a deal that would sell Lord & Taylor to San Francisco-based subscription rental firm Le Tote. The subscription firm would then operate Lord & Taylor’s 40 retail doors, and, in turn, provide HBC with a bit of its technological know-how so the Canadian firm can tap into Le Tote’s resources to potentially develop a rental business at its Saks Fifth Avenue and Hudson’s Bay nameplates. Word of the possible deal was first reported in Women’s Wear Daily.
Baker, who is leading a management buyout, is also now on the receiving end of an activist investor’s ire—and that investor wants him removed from the company’s board.
The activist, Jonathan Litt, founder and chief investment officer of Land & Buildings Investment Management LLC, expressed his position in a letter to HBC shareholders Thursday. According to Litt, he and Craig Melcher, the hedge fund’s president and portfolio manager, met on Wednesday with David Leith, HBC’s special committee chairman and representatives from the committee’s advisors at TD Securities, JP Morgan and Centerview.
“If the Management Buyout Group’s intention was to monetize assets after taking the company private, which we understand they have already been discussing with potential buyers, the board with the benefit of qualified minority representation should also independently consider this alternative path,” Litt said.
The Baker-led buyout–which includes Rhône Capital LLC, WeWork Property Advisors, Hanover Investments (Luxembourg) S.A. and Abrams Capital Management L.P.–was first disclosed on June 10. The group collectively owns 57 percent of HBC’s outstanding common shares. It’s per-share proposal was for 9.45 Canadian dollars ($7.12) for an all-cash deal valued at 1.74 billion Canadian dollars ($1.31 billion). At that time, Baker disclosed that the company had inked a deal to sell certain European assets for 1.5 billion Canadian dollars, which is slated to close this fall. HBC had already said in May that it was exploring its options for the Lord & Taylor business.
After HBC formed a special committee to review the offer, Canadian private equity firm Catalyst Capital Group Inc. pitched a cash offer last month of 10.11 Canadian dollars ($7.70) per share to acquire up to 14.84 million shares. All conversions were at current exchange. The Catalyst offer is just for a portion of the total shares outstanding at HBC, while the Baker-led offer is to take the company private.
Catalyst, which pitched its offer so it could have a greater say in the future of HBC, has also said that Baker’s offer is inadequate. Last Friday, the HBC special committee updated shareholders on its review process and noted its belief that the buyout offer was inadequate.
Both Land & Buildings and Catalyst, as minority investors, are pushing for a higher offer.
To that end, it’s no surprise that Litt took issue with a letter from Baker to the special committee last Thursday, which the activist said “essentially threatens minority shareholders that the shares could fall precipitously to pre-offer levels if they do not accept Baker’s woefully inadequate offer.”
He also noted that the value of the European asset deal, which equates to about 8 Canadian dollars per share ($6.05), is close to Baker’s per share offer of 9.45 Canadian dollars ($7.15), “without any value being realized from the company’s other vast real estate holdings and retail businesses.”
Litt also said HBC should “immediately disclose any and all information, including any presentations which may have represented a value materially above the offer price,” that Baker made as chairman either prior to or during the buyout offer. The board, he said, needs to investigate whether Baker was “engaged in any tipping or otherwise the selective dissemination of material non-disclosed information.”
To date, there is no indication of any wrongdoing on Baker’s part. And minority investors often make statements aimed at supporting their position, whether that’s for a higher offer or, in this case, to oust the company chairman from the board.
Litt went on to tell shareholders that if the buyout offer is rejected, he will call for a special shareholders’ meeting to remove Baker. What he’d want then, is the election of a former HBC executive to the board who he said “will encourage the company to immediately undertake a plan to monetize the company’s real estate and distribute proceeds to shareholders, which we believe will result in substantially higher proceeds” than the proposed buyout offer.
The Special Committee of the Board of HBC told Sourcing Journal in an emailed statement Thursday, “The Special Committee and its financial advisors continue to have productive discussions with various shareholders this week, where we have been listening to their perspectives directly. The Special Committee is committed to acting in the best interest of the Company and all of its shareholders—beyond that we’re not going to comment on specific shareholder discussions. As previously disclosed, work on the formal valuation remains ongoing and we continue to expect that work to be completed in September 2019.”