Hudson’s Bay Co. (HBC), a middle-market Canadian department store chain with a similar assortment to Macy’s, has agreed to pay $2.4 billion to acquire Saks Inc. (SKS:US), one of America’s most prestigious luxury retailers.
Hudson’s Bay, founded in the 17th century as a fur trading company, will pay $16 a share in cash, a 30 percent premium to New York-based Saks’s closing price on May 20, the day before media reports emerged that Saks was exploring alternatives, according to a statement today. The transaction, which brings together the Hudson’s Bay, Lord & Taylor and Saks Fifth Avenue brands, creates a company that will operate 320 stores.
The audacious move is a coup for Hudson’s Bay Chief Executive Officer Richard Baker, 48, who over the past seven years has acquired and refreshed retail chains while leveraging their real estate. Saks will continue to be based in New York and retain its existing management, Baker said today. While the newly merged entity will combine back-office operations to save costs, the three chains will retain separate buying operations so the merchandise will reflect each brand’s identity.
“We believe that by working together we can continue to enhance and optimize the Saks business while preserving their iconic brand,” Baker said on a conference call with analysts. “While there are numerous opportunities to collaborate and drive efficiencies, we will respect the integrity and uniqueness of the Saks franchise,” he said.
Hudson’s Bay is Canada’s largest department store chain, with 90 stores selling goods ranging from shoes to perfume and appliances to linen. Last year it generated about C$4 billion ($3.9 billion) in sales.
In 2008, NRDC Equity Partners LLC, owner of the Lord & Taylor and Fortunoff chains, agreed to buy Hudson’s Bay, investing $500 million in new equity. Baker, who then ran NRDC, became CEO of Hudson’s Bay.
He hired Bonnie Brooks as president and put her in charge of The Bay after Brooks engineered the turnaround of Hong Kong-based department store Lane Crawford Joyce Group. Under Brooks, Hudson’s Bay has upgraded and modernized its stores and replacing under-performing brands with stronger ones.
Hudson’s Bay will benefit from adding “the luxury counterpart” to its lower priced Hudson’s Bay and Lord & Taylor chains, Mortimer Singer, president of New York retail consulting firm Marvin Traub Associates, said in a telephone interview today. The combined nameplates can leverage their now larger buying power with vendors of fashion priced below the highest designer level, he said.
“It seems like a smart move and a continuation of everything Richard Baker has already done,” Singer said.
The $16 a share price is “fair,” Singer said.
Saks rose (SKS:US) 4.2 percent to $15.95 at the close in New York and has advanced 52 percent this year. Hudson’s Bay increased 5.8 percent to C$17.45 in Toronto for a 4.4 percent advance in 2013.
Luxury retailers have fared better than mid-priced chains and discounters since the industry emerged from the recession. They wealthiest consumers, who are insulated from concerns about persistent unemployment, have returned to their stores, snapping up even the highest-priced goods. Neiman Marcus Group Inc., the Dallas-based luxury chain owned by TPG Capital and Warburg Pincus LLC, also is seeking the capitalize on the rebound, in its case by pursuing an initial public offering.
Saks trails Neiman Marcus and Nordstrom in key metrics including sales per square foot because Saks over-expanded last decade and is saddled with a number of under-performing stores. Saks posted revenue of $3.15 billion last year, short of the $3.28 billion it recorded in the retail year that ended in early 2008. Chief Executive Officer Stephen Sadove has been closing the chain’s underperforming branches. It now operates 41 namesake stores, compared with 54 in early 2007.
Including debt, the transaction is valued at $2.9 billion. Hudson’s Bay, founded in 1670 and based in Toronto, expects the deal to produce C$100 million ($97 million) in cost savings within three years. Saks hired Goldman Sachs Group Inc. in May to explore strategic alternatives, including a sale.
Hudson’s Bay is paying about 9 times Saks’s earnings before interest, taxes, depreciation and amortization on an equity basis, compared a median multiple of 8 for similar deals compiled by Bloomberg.
The combined company will have 179 full-line department stores, 72 outlet stores and 69 home stores throughout the U.S. and Canada, along with three e-commerce sites, according to the statement. Saks has locations on Fifth Avenue in New York City and Wilshire Boulevard in Beverly Hills, California, while Hudson’s Bay has properties in downtown Toronto, Vancouver and Montreal.
Hudson’s Bay plans to expand Saks Fifth Avenue into Canada and continue to roll out Saks’s outlets across the U.S., it said. It will evaluate creating a real estate investment trust with the combined portfolio of the three main retail nameplates it will now own, it said.
Baker has a lengthy history in real estate investment and has acted as the non-executive Chairman of Retail Opportunity Investments Corporation, which focuses on retail properties located on the east and west coasts of the United States. ROIC owns and operates 50 shopping centers, encompassing about 5,600,000 square feet, according to the company’s website.
A retail REIT “makes a lot of sense,” said Dan Fasulo, managing director at Real Capital Analytics Inc. in New York, which tracks commercial-property sales. “It’s a way to recognize the underlying value of those assets, which are significant. Saks is on one of the best corners and in some of the more premier markets in the country.”
Deborah Weinswig, an analyst at Citigroup in New York, in May valued Saks’s real estate portfolio at $1.5 billion before debt, or about $6 a share after net debt. The company’s Fifth Avenue flagship store represents over $800 million of this value, she estimated.
Hudson’s Bay Company follows several other Canadian retailers into creating real estate investment trusts to make the most of valuable properties. Canada’s largest grocery chain, Loblaw Co., Canada’s largest grocery chain, Loblaw Co., established its real estate trust, Choice Properties REIT earlier this year to spin off 75 percent of its real estate. Canadian Tire, Canada’s largest sporting goods retailer, announced on May 9 it would create a C$3.5 billion REIT in an initial public offering this fall.
REITs, which receive preferential tax treatment from the government, are companies that invest in income-producing real estate and pay out most of their income to investors through unit distributions.
Saks has 40 days to seek bids from other suitors. Hudson’s Bay plans to finance the purchase with $1 billion of new equity, $1.9 billion of senior secured loans and $400 million of senior unsecured notes and available cash on hand.
“It’s bold and it’s risky,” Walter Loeb, president of Loeb Associates in New York, said about the deal in a telephone interview today. “Richard Baker may be buying too many unprofitable stores at Saks along with those at Lord & Taylor that he will have to rationalize.”
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