Why’s now the right time to go private, according to Hudson’s Bay Co?
It all boils down to “certainty,” the Canadian department store retailer is telling minority shareholders. And in a volatile retail market that’s seen thousands of stores crumble, coupled with a real estate landscape that’s not terribly kind to the commerce sector, that certainty can make all the difference in the world.
On Monday the company said it has agreed to go private, accepting a higher offer from the Richard Baker-led a group of shareholders for 1.90 billion Canadian dollars ($1.45 billion), or a per-share valuation at 10.30 Canadian dollars ($7.86). According to Hudson’s Bay’s investor deck, posted on the company’s website, the deal will be funded by the company’s existing cash resources, along with committed debt financing from the Bank of America N.A., BofA Securities Inc. and the Royal Bank of Canada.
The accepted offer is higher than the original per-share offer–by 9 percent–of 9.45 Canadian dollars ($7.12) for a deal in June that was valued at 1.74 billion Canadian dollars ($1.31 billion).
The transaction is expected to close in late 2019 or early next year, once the company receives the requisite approvals from certain Canadian regulatory authorities, a court-approved plan of arrangement that cancels the common shares of Hudson’s Bay, and the nod from a majority of the minority shareholders.
Hudson’s Bay said the revised agreement followed an “independent and thorough evaluation process and negotiations” by the board’s Special Committee and its advisors. The new per-share offer represents a “substantial 62 percent premium” to minority shareholders, based on the closing price of company shares on June 7, 2019–the last day of trading prior to when the Baker-led group’s announced its intentions to take the company private.
Baker, governor and executive chairman of Hudson’s Bay, leads a shareholder group including Rhône Capital LLC, WeWork Property Advisors, Hanover Investments (Luxembourg) S.a. and Abrams Capital Management LP.
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David Leith, chair of the Special Committee, said, “Over the last four months, with the assistance of our independent financial and legal advisors, we have conducted a thorough evaluation of the Shareholder Group’s proposal and alternatives available to [Hudson’s Bay] to maximize shareholder value. Following this comprehensive evaluation and extensive negotiations with the Shareholder Group, and consideration of the applicable risks and the opportunities and alternatives available, we are pleased to have reached an agreement with respect to a transaction that provides immediate and fair value to the minority shareholders.”
Some of the reasons cited by the Special Committee in favor of the transaction include a deteriorating retail environment due to industry headwinds, such as the competitive landscape for department store and specialty retailers; ongoing restructuring costs; evaluation of the value of the company’s real estate and the assessment of real estate redevelopment potential.
In the investor deck, the company outlined several strategic initiatives it has pursued since 2017, such as the sale of the Lord & Taylor flagship in Manhattan’s Fifth Avenue location, the divestiture of Gilt and the closure of up to 20 Saks Off 5th stores. Yet, despite these and other actions, the company’s share price has seen a two-year decline of 35 percent and a one-year decline of 41 percent.
In 2019, the six-month decline was 32 percent and the three-month decline was 16 percent. The transaction provides an “immediate and certain value [that’s] payable in cash,” the company told investors, noting that absent a transaction, “there is significant risk to [Hudson’s Bay’s] share price performance given limited value-enhancing alternatives available.”
The special committee had hired TD Securities to evaluate the common shares–it gave a fair market value range of Hudson’s Bay common shares at between 10.00 to 12.25 Canadian dollars ($7.63 to $9.34)—and CBRE Inc. and Cushman & Wakefield Inc. to value the real estate assets. The pro-rata share of Hudson’s Bay’s real estate portfolio stands at 8.75 Canadian dollars ($6.67), the real estate advisors estimated, reflecting the “combination of lower current market rents, the increasing risks associated with the retail industry, recent operating challenges and a deterioration of retail real estate market conditions,” the company said.
Hudson’s Bay is recommending minority shareholders vote in favor of the transaction, with Leith adding, “The Special Committee is confident that this transaction represents the best path forward for [Hudson’s Bay] and the minority shareholders.”
Hudson’s Bay expects to hold a special meeting in December for shareholders to vote on the take-private transaction.
Since the Baker-led group disclosed its intent in June to take the company private, Hudson’s Bay announced the sale of Lord & Taylor to Le Tote, a transaction slated to close next month, and said it sold the remaining stakes in its European real estate and retail joint ventures.
Hudson’s Bay’s portfolio includes its namesake Hudson’s Bay stores, the Saks Fifth Avenue nameplate and Saks Off 5th doors.