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HBC owner Richard Baker: 'I couldn?t imagine Hudson?s Bay Co. and its real estate not being together.' (Adrian Wyld/The Canadian Press/Adrian Wyld/The Canadian Press)

HBC owner Richard Baker: 'I couldn?t imagine Hudson?s Bay Co. and its real estate not being together.'

(Adrian Wyld/The Canadian Press/Adrian Wyld/The Canadian Press)

Real estate seen as part of HBC offering Add to ...

Richard Baker envisions an initial public offering of his Hudson's Bay Co. that will include the venerable retailer's valuable real estate.

The U.S. owner of HBC, whom industry sources say is speaking to bankers about spinning off 20 per cent of Canada's oldest merchant to the public, views its real estate as an integral part of the operation. Worth billions of dollars, the properties could be the company's most lucrative asset, industry watchers say.

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"I love owning real estate," Mr. Baker, scion of a U.S. family shopping-centre empire, said on Tuesday. "I couldn't imagine Hudson's Bay Co. and its real estate not being together."

The spotlight on HBC's real estate underlines the importance of the asset for retailers: Its real estate adds economic heft to HBC, and without it - if Mr. Baker didn't include it in the IPO - its outlook may be gloomier.

As Mr. Baker gets closer to choosing lead bankers to spearhead an initial offering, he's shedding a bit of light on privately held HBC. It includes the flagship Bay chain, which is enjoying signs of a turnaround, as well as its U.S. sister, department store retailer Lord & Taylor. Timed probably for the fall, the offering could raise as much as $500-million, observers predicted.

With roughly $7-billion in annual sales and a profit of about $450-million in 2010, the company probably has more value in its real estate than in its retail operations, they say. Its Canadian properties include the downtown Toronto store and adjoining office tower, which take up an entire city block.

HBC's real estate makes the company attractive because it is a more stable asset than retailing alone, said John Williams of retail consultancy J.C. Williams Group. An array of U.S. chains, including the upscale Nordstrom, are searching for sites to set up shop here, but can't find good locations.

"Retail real estate is very valuable," Mr. Williams said. "It's stable and in short supply."

Indeed, even before HBC goes public, the Bay could be scooped up by a U.S. retailer such as J.C. Penney Co. Inc., observers suggested. The move would be similar to another of Mr. Baker's deals this year: He sold most of HBC's Zellers stores to U.S. discounter Target Corp. for $1.8-billion, more than his purchase price for the entire HBC; by 2013, Target plans to convert the outlets to its own banner.

HBC's real estate includes leased properties at rates that are a fraction of those paid by many rivals.

Its real estate adds economic clout to HBC's outlook, making for a stark contrast with the poor track record of public department store companies in Canada, Mr. Williams said. The iconic Eatons raised $170-million in an IPO in 1998 and within a year entered bankruptcy protection, with rival Sears Canada Inc. and others racing to pick up its coveted store sites. HBC struggled as a public company until 2006, when another U.S. investor acquired it, whose estate later sold it to Mr. Baker.

On Tuesday, Mr. Baker gave a glimpse of his vision for HBC to an audience of fashion executives, many of them his suppliers or rivals. He said he's ready to take on the growing number of foreign retailers invading Canada, including the savvy Nordstrom. He's familiar with the U.S. chains, which are tenants in his U.S. malls.

"Nordstrom - bring it on," he said. "Nordstrom wants to open up one, two, three or four stores in Canada. … We think it will just help us focus on how we can raise the bar and do our job better."

He said the Bay team got lazy in the past because it has almost no direct competition in Canada. "Well, that's all changed," he said. "We're panicked every morning here at Hudson's Bay Co. We want to know every single morning: 'Do we have the best deal in the market? Do we have the best advertising? Are we doing everything we can to take care of our customer?'" He said Lord & Taylor management frets daily about Nordstrom, Bloomingdale's and others.

He wouldn't speak about the IPO process, but said he wants to remain "very involved" in the company - and with its real estate. "There's a lot of change that we've gone through and I believe there's a lot of change ahead of us," he said.

The deal with Target helped him understand the difference between Canadian and U.S. landlords. After a first meeting with Target, the top 10 Zellers' landlords said they were ready to be flexible and make changes to leases. "We will do what we have to do because this transaction is good for Canada," he quoted each of the landlords as saying.

The response was both educational and shocking for Mr. Baker. "In the United States, you could have brought in 1,000 real estate developers and not one of them would have said anything about a transaction being good for the United States. Doing business in Canada is very different."

Mr. Baker, 45, also revealed a personal side. His eyes welled with tears at one point when he talked about how much his family, including grandparents and great-grandparents, have influenced him in his often-contrarian business strategy.

He even consulted with his then 98-year-old grandmother in 2008 before he acquired HBC. "I said, 'I'm nervous because all the smart folks in Canada think we're crazy. [They say]HBC is a great company but it can't be fixed. All that real estate is not worth anything.'… My grandmother said to me, 'You have a vision. You have a plan.' …

"She smiled, and here we are."

Follow on Twitter: @MarinaStrauss

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