(Reuters) – The successful $ 1.3 billion offer from Richard Baker, executive president of Hudson's Bay Co, to take charge of a department store operator depends on the possibility that an independent assessor considers the company more like a retailer and less as a property owner, corporate governance experts and analysts said.
FILE PHOTO – USA flags fly out of Saks Fifth Avenue in New York, United States, June 19, 2017. REUTERS / Lucas Jackson / File Photo
Much of the value of Hudson Bay is locked up in its real estate. If the company sold some of its properties to raise money, it could have raised more than what Baker offered, but it would have had to pay the rent to manage some of its stores.
The buying consortium of Baker, which already owns 57% of Hudson's Bay, has made an offer of $ 9.55 per share for the rest of the Canadian company, a 48% premium to the place where the title was traded before the announcement.
However, some of the minority shareholders, including the hedge fund Land & Buildings Investment Management LLC, declare that they value the company's assets between C $ 28 and C $ 33 per share. Shares in Hudson's Bay closed trading on Friday at C $ 9.73, above the offer price of C $ 9.45, as investors bet on a cushioned offer.
The large valuation gap is due to disagreements over how much of Hudson's main Bay property can be disposed of while maintaining its operations. The sale of real estate increases the liquidity, but also makes the lease of the space for the shops in which it operates more expensive for the company. As a result, he would probably close the shops and his retail footprint would start to shrink.
"There is a judgment on the assessment, which can always be difficult," said Catherine McCall, executive director of the Canadian Coalition for Good Governance, an organization representing institutional shareholders in Canadian public companies.
Hudson's Bay operates 39 stores under the Saks Fifth Avenue brand, 133 stores under the Saks OFF 5th brand, over 40 stores under the Lord + Taylor brand, 90 Hudson's Bay stores and 37 stores in Canada, which the company plans to close this year under the Home Outfitters brand.
The asset of the Hudson trophy's Bay is the Saks Fifth Avenue building in Manhattan, which this year has completed a $ 250 million renovation.
The most recent public estimate of Hudson's Bay for the value of its real estate assets was in September 2018, when CEO Helena Foulkes set it at $ 28 per share. Baker offered about a third of that because he claims that the company should almost liquidate to get all the real estate value.
The Toronto-Dominion Bank, which was hired by a board committee of Hudson's Bay to independently evaluate the take-private agreement, will recommend whether the company should accept the offer as a fair, or reject it and try to negotiate further.
The steering committee excludes representatives of the Baker purchasing consortium and receives the power to prevent any agreement, even if potential buyers otherwise control the company. In an example of this, a special board committee has sunk the hopes of the founding family group of Nordstrom Inc last year to deprive the US department store operator, after refusing the offer from 8 , 4 billion dollars.
The methodology used by the Toronto-Dominion Bank to evaluate the offer of Hudson's Bay will be the key to the result and will be subjected to a careful examination by the shareholders. The bank will probably consider how the shares of comparable companies will trade, analyze similar transactions and consider how a financial buyer such as a private equity company would pay, said Andrey Golubov, a finance professor at the University of Toronto.
"It is not done just to justify the offer. Having said that, evaluation is not a science," said Golubov.
Hudson's Bay declined to comment, as did a spokesman for Baker's buying consortium. TD Bank spokesmen did not respond to requests for comment.
DESCALING ON REAL ESTATE GOODS
The lease-sale agreements in which retailers sell their properties and become tenants in their stores have become increasingly popular in recent years as the recession in the retail trade caused by the increase in Internet purchases has put it under pressure retailers collect money.
However, some retailers are opposed because they consider the rental obligation to be heavy, a position that often attracts criticism to investors. Macy's Inc, for example, another department store operator, was put under pressure by the hedge fund Starboard Value LP three years ago to do more to cash in its real estate.
Even if the Toronto-Dominion Bank blesses an offer from the Baker consortium and the board committee negotiating an agreement approves it, the acquisition still faces some obstacles.
The majority of shareholders who are not affiliated with the buyout consortium must vote for this, representing approximately 21.5 percent of the company's shareholder base. Opponents could still dispute the agreement in court when the company seeks approval for this before a judge under the Canada Business Corporations Act.
But the successful legal challenges of the operations that followed the acquisition process by the management outlined by the Ontario Securities Commission, like Hudson's Bay is trying to do, are rare.
"Most of these agreements are executed once the approval of the board is obtained and a transaction agreement is signed," said Jeremy Fraiberg, chairman of the merger and acquisition group of Osler, Hoskin & Harcourt LLP.
Reporting by Jessica DiNapoli and Harry Brumpton in New York Edited by Greg Roumeliotis and Cynthia Osterman
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