A deal for the Bay is finally close, but is the retailer even worth saving?
The Financial Post takes a look at 11 people and companies we’ll be watching closely in the new year.
It is 4 p.m., precisely a week before Christmas at a Hudson’s Bay store at the corner of Yonge and Bloor in downtown Toronto. The area is one of the city’s biggest shopping destinations during the busiest season of the year. But the Bay is dreary.
Most of the fluorescent lights are burnt out in the men’s fragrances department. A level up, in women’s wear, the mannequins outnumber the humans. Dozens more lights are out, others are flickering and one is buzzing, while the ceiling panels are stained black by either dust or smoke, it’s difficult to tell.
The carpet, too, has curious stains. A splotch beside a rack of Adrianna Papell dresses looks like a lady dancing. And the renovation work on the hotel next door groans through the floor, thudding, thrashing, scratching.
This is the Bay on the edge of the so-called Mink Mile, a magnet for the city’s fanciest shoppers. This is also a little piece of what two warring factions of investors, bankers and Bay Street lawyers have been fighting for months to control.
Late Friday, Hudson’s Bay Co.’s chairman Richard Baker and his group of shareholders announced they were raising their bid for the department store chain by $75 million, to $11 a share or $1.18 billion in total. That increase was enough for the takeover bid’s loudest opponent and HBC’s largest minority shareholder, Catalyst Capital Group Inc., which pledged to support the deal when it’s put to a vote.
And with that, the takeover battle for Canada’s oldest company — older than the country by 197 years — appears close to a conclusion, but amid all the talk around the fate of the historic Canadian retailer, a nagging question remains: Is the Bay actually worth saving?
Industry observers say it would take some combination of closing certain stores, shrinking others and making drastic improvements to the in-store experience — meaning improved service, cleaner stores and a better mix of brands — to make the Bay relevant again.
But even then, it might be too late.
“Do I think in its current state it can survive? No,” said Fred Waks, a former president of RioCan REIT who has spent decades developing shopping centres.
If you want to know why the Bay, unchanged, will die, Waks invites you to walk into one of the stores and look around.
“You look at the floors and you look at the ceilings and you look at the fixtures,” he said. “To find somebody to help you is extremely rare.”
Do I think in its current state it can survive? No
Fred Waks, a former president of RioCan REIT
Up till now, HBC has been frank about its survival prospects if shareholders reject Baker’s offer. Left on the public market, the argument goes, HBC would struggle to find support for the expensive, time-consuming work of overhauling the business, repurposing real estate and improving its e-commerce efforts.
Since Baker first announced the takeover bid this summer, Catalyst has been the main shareholder standing in his way. Arguing that Baker was undervaluing the company, Catalyst launched a competing bid of its own.
Baker’s new offer rescues what looked like a doomed deal since Catalyst, with a 17-per-cent stake, boasted enough allies to derail the old bid in a shareholder vote, which required support from a majority of minority shareholders.
For months, Baker’s group refused to budge, insisting $10.30 was their “best and final offer” and declining to entertain outside bids. But Friday’s revised bid — the third in a series of Baker group offers, starting at $9.45 in June — matched what Catalyst was itself willing to pay for HBC.
At $11 per share, Catalyst’s 32.3 million shares are worth $22.6 million more than they were at $10.30 per share. With Catalyst now onside, Baker’s group of shareholders — a handful of international investors, including the Emirate of Abu Dhabi and Boston-based Abrams Capital Management LP — have surpassed a major hurdle.
A special committee of HBC’s board of directors have endorsed Baker’s offer as the best, most plausible way forward. But there are still some barriers to the deal. In light of the new offer, the committee is seeking an updated valuation and fairness opinion on the company. HBC is allowed to terminate Baker’s $11-per-share deal if it’s below the new fairness opinion’s formal valuation range. The deal also needs to pass a shareholder vote.
But HBC’s challenges do not end if and when the deal closes.
“The retail environment is deteriorating,” special committee chair David Leith told shareholders in a November letter.
In the year and a half since Helena Foulkes took over as chief executive, HBC has rid itself of underperforming assets so it can focus on its core businesses — the Bay and Saks Fifth Avenue — while closing Home Outfitters and selling off Lord and Taylor, as well as the Gilt e-commerce business and HBC’s European operations.
But still, it wasn’t enough to stop HBC’s stock from tanking, Leith said in December. Over five years, the price fell about 64 per cent, to around $6 in June, before Baker’s take-private bid was announced. In a call with investors in December, Foulkes acknowledged the Bay’s biggest issues: hard-to-find staff and hard-to-navigate stores.
“We’re fixing the fundamentals of the store environment,” she said.
Foulkes is also in the middle of cutting down the Bay’s mix of brands, culling 600 older, more conservative ones, and replacing them with 75 designer labels. For those new brands, the Bay is focusing on getting them from places such as South Korea and Scandinavia, instead of the traditional fashion markets of London, Paris and Milan.
But fixing the business will take cutting more than brands, said Kathleen Wong, a retail analyst at Veritas Investment Research.
“It’s tough,” she said last month. “There are way too many stores.”
For years, Wong said, HBC seemed intent on expanding, adding new banners and pushing into new markets while its flagship brand, the Bay, floundered. The Bay currently has 89 department stores across Canada, but reducing that footprint is complicated.
“When you look at it, it’s a bit late now,” she said. “If HBC wants to get out now, who’s going to buy the real estate?”
One major problem is that the properties were built for department stores and, lately, department stores have not been strong tenants. In more suburban areas, the Bay tends to be an anchor tenant in shopping malls, and locked into hefty long-term leases. Again, it’s tough to move a footprint of that size.
“It’s not like you can just whip out a pad of paper and decide you’re going to move out of some of these locations,” said Michael LeBlanc, a former executive at HBC in the early 2000s who now runs M.E. LeBlanc & Co., a retail consultancy. “They’re decades-long leases and who’s gonna buy them?”
The other issue with maintaining such a vast cluster of sprawling department stores is that it takes a lot of money to run. You need the staff and the budget to, say, replace each light bulb when it goes out. If you don’t, the whole brand reputation suffers.
“If you’ve got a big fleet like that, and you want them all to maintain the brand standard, it takes a lot of investment,” LeBlanc said. “Maybe you don’t need them to be as big as they are.”
But shrinking stores causes a similar problem: “Who gets the rest?” he asked, pointing out that it takes time and investment to redevelop parts of stores for new tenants.
But regardless of the size, the stores just need to look and operate better, said Waks, the retail real estate developer, who now runs Trinity Development Group Inc.
“If you don’t put the capital in real estate,” he said, “you do not get the productivity.”
The best example of that, Waks said, is the Bay at Yonge and Bloor. It’s in a prime shopping location and yet it doesn’t appear to have been upgraded in years.
Why on Earth is anyone going to shop there based on the shopping experience?
“Why on Earth is anyone going to shop there based on the shopping experience?” he said, also pointing out that a flagging department store is at risk of losing the best brands.
In a neighbourhood such as the Mink Mile, brands have other options. The luxury department store Holt Renfrew is down the street. And major brands such as Chanel and Versace have their own stores in nearby Yorkville.
“They don’t want to downplay their brand,” Waks said. “You have to show them that you’ve got the customer base and the sales and the ability to move their wares.”
If not, the brand pulls out, giving customers one less reason to shop in the store. As fewer customers come, more brands stay away, sending the store spiralling further and further, until it looks something like the Bay on Bloor: dowdy, dirty and empty.