ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.
In striking a deal to acquire Saks Inc., Hudson's Bay Co. boss Richard Baker may feel a sense of deja vu. So might Canadian investors – but for very different, and much less positive, reasons.
For Mr. Baker, the U.S. real estate tycoon turned retail magnate, Saks today looks a lot like HBC did when he acquired control of the venerable Canadian business five years ago. Like HBC, Saks is a chain with a long and illustrious past (founded in 1867) that has struggled in the present, failing to adjust well to the modern retailing environment. Like HBC was at the time, Saks is a somewhat awkward combination of an upscale retailer (Saks Fifth Avenue) and a discount chain (Off 5th) that, on the whole, sorely needs to rediscover a compelling identity. Doubtless, Mr. Baker – who restored Hudson's Bay's mojo as a fashion destination – is confident he can work similar magic with Saks.
But Mr. Baker's latest move also conjures up some older and not so pleasant memories of another head of a Canadian-based business who made a bold grab for a substantial piece of glory in the U.S. retail sector – with disastrous results.
If you were around in the 1980s, you'll remember Robert Campeau as the daring, charismatic Canadian real estate tycoon turned retail magnate whose ambitious reach in U.S. retail considerably exceeded his financial grasp. Mr. Campeau spent $11-billion (U.S.) to win heated bidding wars for Allied Stores Ltd. and Federated Department Stores Ltd. When both Canada and the U.S.'s economies turned south and Mr. Campeau's businesses were swamped by the debts taken on to build his short-lived retail empire, he quickly went bankrupt.
Given that both men were successful in real estate before aggressively expanding into big-name retail, the similarities are hard to miss. And there's little doubt that Saks is a big asset for a company of HBC's size to chew: Saks Inc.'s annual sales are about 80 per cent as big as HBC's. What's more, HBC is issuing $2.3-billion of new debt in conjunction with this deal; the transaction will increase HBC's total debt to $3.2-billion, nearly triple its current size.
Still, that's nothing like $11-billion in 1988 dollars. Mr. Baker has not gotten himself entangled in an obsessive, protracted pursuit that resulted in the gross over-bidding that was Mr. Campeau's downfall. Saks only put itself up for sale a couple of months ago; the battle for the assets was muted and civilized. The price HBC is paying, $16 a share, is less than a 5-per-cent premium over last Friday's close; while the price does represent a five-year high for the stock, Saks shares routinely traded above $20 prior to the last recession. The company's real estate alone is said to be worth $1.5-billion.
HBC intends to slice its dividend almost in half, using the saved cash to accelerate debt repayments. It also continues to look at spinning off some of its ample real estate into a REIT – which, now that the portfolio is enhanced by the Saks real estate assets, is a move that could quickly rehabilitate HBC's temporarily wayward balance sheet.
These considerations reflect that Mr. Baker has recognized the threat that debt-fuelled acquisition sprees can pose to a retailer. In that respect, he hopes to learn from history, rather than repeat it.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe .
David Parkinson