It seems unlikely that a perennial stock market loser, a company with a lousy return on equity and capital, one that seems in a permanent, and increasingly desperate, state of re-invention, could attract takeover bids.
Yet Hudson's Bay Co., Canada's largest and oldest retailer, seems on the verge of attracting at least one bid, and perhaps more, for some or all of the company.
“There will be a war for this one,” said an investment banker who knows HBC.
He was referring to two names, Target Corp. and Jerry Zucker. The former is one of the largest retailers in the United States.
There has been speculation for some time that Target wants to buy the Zellers Inc. division from HBC or, failing that, the entire company. The latter, Mr. Zucker, owns 18.1 per cent of HBC. His company, InterTech Group Inc., South Carolina's second-largest privately held company, is a fan of big, undervalued assets. InterTech executives have said repeatedly that HBC, which trades at well less than book value, is the value investor's dream.
The speculation is that Mr. Zucker is encouraging Target's potential lunge at HBC because he needs to get out of the stock. He has already made a fair amount of money on his investment, to be sure. His share purchases were first disclosed last year, when he reached 10-per-cent ownership. This year alone, HBC stock is up 22 per cent, taking the one-year return to 56 per cent. Much of that gain can be attributed to takeover speculation.
Mr. Zucker's problem is that he can't really monetize his gains in the absence of a takeover; bleeding the shares out would put downward pressure on the price, potentially wiping out his profit.
Selling to Target at a fat premium would elegantly solve his dilemma. But sources said Mr. Zucker might be tempted to launch a rival bid for HBC if Target's bid isn't rich enough, or if he thinks Target were about to land Zellers at a knockdown price.
Why all the interest in Hudson's Bay? Three answers: Location, location, location.
When U.S. retailers come to Canada, they typically buy existing chains. Wal-Mart did that in 1994, when it bought the Woolco stores and rebranded them. More recently, Best Buy, the big electronics retailer, bought the Future Shop chain. Target may be tempted to do the same with Zellers.
Zellers stores have a national presence, with 312 stores (against Wal-Mart's 231). They are the right size and many of them are in superb locations.
And they aren't working for HBC, partly because of the intense competition from Wal-Mart, and partly because management has never fastened on to a down-market marketing formula that works. Zellers could have been Canada's Wal-Mart. It's not even close. Wal-Mart's estimated sales per square foot are $270; Zellers' are $110. Wal-Mart has plans to open 30 more stores in Canada this year alone. Zellers is closing stores.
Zellers, as Zellers, appears doomed.
As different stores under different ownership, they may have a future because of their land value. This point has not escaped Target. Nor has it escaped other retailers, notably Home Depot. In the United States, Home Depot is going after smaller, urban locations. It recently announced the purchase of 24 Kmarts, which it will convert.
In an interview in a home improvements trade publication called Hardlines, Home Depot Inc. CEO Bob Nardelli said a large acquisition was possible in Canada. He mentioned Zellers. The average Zellers store covers 93,000 square feet. The more compact Home Depot stores are about 90,000 square feet. Zellers seems a natural fit for Home Depot. Canadian Tire Corp., while an unlikely bidder for Zellers, would doubtless like to pick up some Zellers locations once the dust settles.
Zellers, unloved by consumers and investors, has too much location value to go quietly. Target may bid. Mr. Zucker or Home Depot may bid. Investment bankers say private equity companies, such as New York's Kohlberg Kravis Roberts & Co., a familiar name in the Canadian buyout scene (Yellow Pages and Shoppers Drug Mart), might get involved too if the numbers look right.
If Zellers goes, can HBC be far behind?
The Bay stores sit on valuable real estate, too. They are underperformers. It has been many years since Hudson's Bay has earned its cost of capital. Companies that don't earn their cost of capital are slow-motion suicides. The era of the department store seems over and HBC management doesn't know how to bring it back.
Hudson's Bay, 334 years old, has tried to re-invent itself many times in recent decades, under different banners, different merchandising ploys and various acquisitions and sales.
Sadly, it appears only one format remains — as someone else's real estate.
ereguly@globeandmail.ca
