/HBC privatization offer sweetened, but could still face opposition

HBC privatization offer sweetened, but could still face opposition

After extensive negotiations, Hudson’s Bay Co. has accepted a sweetened offer from a group of shareholders led by its chairman to take the storied department store chain private, but the nearly $1.1-billion bid could face some pushback from at least one activist shareholder who thinks the offer is still too low.

HBC’s board of directors approved the deal Monday on the recommendation of a special committee of independent directors formed to consider the bid. The approval comes after executive chairman Richard Baker’s shareholder group boosted its offer by nine per cent, to $10.30 per share from $9.45.

Since Baker’s group floated its initial proposal in June, it has endured blowback from a chorus of minority shareholders, who derided the bid for undervaluing the company’s extensive real estate in prime downtown locations housing Saks Fifth Avenue, Saks Off 5th and Hudson’s Bay stores.

The new price is within the range of a fairness opinion from TD Securities Inc., which told the special committee that HBC is worth between $10 and $12.25 per share. 

A source with knowledge of negotiations between the committee and Baker’s group said talks intensified this month after the committee brought in two expert firms to value the company’s real estate.

Based on that analysis — along with feedback from consultants who looked at redevelopment opportunities — HBC estimated its 79 properties are worth $8.75 per diluted share, well below what activist investors have suggested.

For example, Jonathan Litt, founder and chief investment officer of Land and Buildings Investment Management LLC, in 2017 claimed that third parties had valued HBC’s real estate as high as $35 a share.

HBC said its valuation took into account a “deterioration of retail real estate market conditions” as well as the major cash injections and a “long time horizon” that would be required to redevelop the department store properties. Such a move, the company said in a release, “would not result in creating additional value for shareholders in the foreseeable future, compared to the certain value provided by the transaction.”

The special committee unanimously recommended that taking the “immediate and certain value” from Baker’s group was the better option compared to investing the “substantial capital” required to keep the struggling chain relevant.

Catalyst is evaluating the (new) agreement

Catalyst Capital spokesman Dan Gagnier

But one of Baker’s most vocal critics was apparently unmoved by the new price. A source familiar with Land and Buildings’ thinking said the firm still believes the offer undervalues HBC.

Baker’s group, which owns 57 per cent of HBC’s common shares on an “as-converted” basis, will need support from a majority of the minority shareholders when they vote in December. It’s not publicly known how much HBC stock Land and Buildings owns, but another critic, private-equity firm Catalyst Capital Group Inc., has been amassing shares in an apparent attempt to thwart Baker’s privatization plan.

Catalyst in August issued an unsolicited offer to HBC shareholders to purchase up to about 10 per cent of the company’s shares for $10.11 apiece. Catalyst revealed in a regulatory filing last month that it had acquired nearly 16 per cent of HBC’s issued and outstanding common stock.

“Catalyst is evaluating the (new) agreement,” spokesman Dan Gagnier said on Monday.

HBC shares, which closed Friday at $9.45, jumped by more than six per cent to $10.03 in trading Monday. The discount to the sweetened bid suggests shareholders are not expecting either a white knight with a rival bid or an even richer offer from Baker. The current bid, for the shares not owned by Baker’s group, is worth about $1.1 billion.

A source with knowledge of the negotiations noted that a strategic bidder in the retail sector or a financial player could have made a competing proposal to acquire HBC at any time since June. Baker’s group isn’t interested in boosting its bid for a third time or selling its controlling stake to anyone else, the source said. 

In the absence of a rival offer, the Baker bid is the best option for shareholders, said an analyst who did not want to be named.

“If Baker walked away, shares would likely only trade lower,” the analyst said.

Financial Post

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