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Pedestrians walk past a Macy's Inc. store in New York. (Victor J. Blue/Bloomberg)
Pedestrians walk past a Macy's Inc. store in New York. (Victor J. Blue/Bloomberg)

Hudson’s Bay in talks with Macy’s about potential takeover, sources say Add to ...

Hudson’s Bay Co. has approached U.S. rival Macy’s Inc. about a potential takeover and the Toronto-based retailer has also looked at other department-store companies around the world, industry sources say.

The talks are tied to the goal of Richard Baker, chairman of HBC and a U.S. real estate magnate, to become a global department-store powerhouse, buying up retailers internationally with valuable real estate, they say.

“The Hudson’s Bay Co. has tremendous financial strength in its real estate,” a source familiar with the situation said. “As it’s done numerous times in the past, it could use that as a currency to acquire other things, even Macy’s, or other things. … There might be half a dozen other ones around the world.”

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Mr. Baker’s HBC has been on a buying spree over the past few years, acquiring Saks Inc. and its Saks Fifth Avenue chain for $2.9-billion, German-based Galerie Kaufhof for $2.8-billion (U.S.) and the Gilt Groupe e-commerce operation for about $250-million. But HBC faces an increasingly tough retail market that is being challenged by e-commerce heavyweight Amazon.com and other digital players as merchants shrink their brick-and-mortar store portfolios.

Both HBC and Macy’s have reported weaker results in the past year or so and struggled through a disappointing holiday period, which is a crucial season for their business. Their stocks have also suffered. Still, on Friday, amid reports of a possible takeover of Macy’s by HBC, shares in both companies jumped.

But a Macy’s takeover is risky for HBC because the department-store sector is in decline, as is retail real estate generally, said Bruce Winder, partner in consultancy Retail Advisors Network. HBC already has a lot on its plate in integrating its recent spate of acquisitions and plans to expand Saks Off Fifth, he said. And a big acquisition such as that of Macy’s could load it up with debt.

Bank sources said they doubt HBC has the financial strength to take out Macy’s.

The bank sources questioned whether Macy’s real estate portfolio has enough untapped potential to fund a takeover by HBC, noting Macy’s is already cashing in on the value of its properties in a partnership with Brookfield Asset Management. Last fall, they teamed up to redevelop 50 or more of Macy’s stores. But the retailer has resisted a classic sale-leaseback of its real estate assets, even as Starboard and others have pushed for it.

Still, Mr. Baker has a stellar track record in monetizing the value of real estate, Mr. Winder said. Mr. Baker orchestrated the takeover of Hudson’s Bay in 2008 and, three years later, sold most of the company’s Zellers leases to U.S. rival Target Corp. for $1.8-billion (Canadian) – more than the roughly $1.1-billion spent to buy HBC.

“If anyone can pull it off, it’s Richard Baker,” Mr. Winder said.

Shares of HBC, which has a market capitalization of $1.89-billion as of Friday’s close, were up 3.9 per cent to $10.39 on the Toronto Stock Exchange, while those of Macy’s, which had a market value of about $9.99-billion (U.S.) as of Friday’s close, surged 6.4 per cent to $32.69 on the New York Stock Exchange.

Talks between the companies are at a preliminary stage, according to the source. Hudson’s Bay could raise equity and debt against its real estate portfolio, which could be worth $14-billion, to fund the deal, according to The Wall Street Journal, which first reported the news.

Hudson’s Bay executives would not comment nor would a Macy’s spokesman.

But a source familiar with the situation said HBC’s interest in Macy’s and other department-store retailers should not come as a surprise. “This is a company that is not a traditional retailer,” the source said. “This is a company that’s a retailer, that is in the real estate business and that is in the mergers and acquisitions business.”

Sabahat Khan, an analyst at RBC Dominion Securities, estimated the takeout value for Macy’s could range from $18-billion to about $20-billion (Canadian). Assuming HBC follows a strategy similar to the one it used with the Kaufhof deal, in which it sold the properties into a real estate joint venture, the joint venture can borrow about $10-billion against the acquired real estate portfolio to fund half the purchase, he said. That is assuming Macy’s real estate portfolio is valued at about $20-billion, he said.

Macy’s has felt the heat of activist investors that have been pushing it to separate its real estate from its retail business.

Hedge fund Starboard Value held about 1 per cent of Macy’s stock as of Sept. 30 last year. It had pushed Macy’s early on to monetize its real estate.

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