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Shoppers pass by the Christmas displays at the Hudson's Bay store in downtown Toronto on Dec. 12, 2019.Christopher Katsarov/The Globe and Mail

Richard Baker’s plan to privatize Hudson’s Bay Co. received two big blows in recent days and now he’s faced with a difficult decision: Scrap the $1.1-billion bid or sweeten it.

Both are risky.

If Mr. Baker, HBC’s executive chairman, and his allies decide to walk away from the plan after six months of selling shareholders on the assertion that it is the best option for the struggling retailer, it is a near certainty the stock skids.

But if they up the ante on an offer they had already called “full and final,” it could saddle HBC with more financial pressure amid its turnaround efforts with e-commerce rivals chipping away at the traditional department-store structure. There’s also the chance that minority shareholders could spurn that bid, too.

A report on the weekend showed this is precisely the calculation over which the Baker group, which controls 57 per cent of Canada’s oldest corporation, is sweating. Its advisers have been told to hang tight over the next week or so while the group huddles, according to Bloomberg.

This has shaped up into an epic bout of shareholder activism, after Catalyst Capital Group Inc. amassed a 17.5-per-cent stake in HBC, then went about trying to wreck Mr. Baker’s plans on a number of fronts. Its main argument is that the $10.30-a-share bid for the minority is too cheap, especially given the perceived value of the chain’s real estate portfolio.

Last week, Catalyst’s lawyers tried to get the Ontario Securities Commission (OSC) to block the bid or postpone the shareholder vote, arguing that HBC was deficient in its disclosures about the privatization plans and that Mr. Baker breached his management and fiduciary duties.

After a two-day hearing, the Toronto-based private-equity fund failed to get the offer kiboshed, but the regulator ordered that the takeover circular document be amended and the vote – which had been scheduled for Tuesday – postponed. The meeting will have to be rescheduled after the new circular is sent to shareholders.

If Mr. Baker and his cohorts, which include Rhone Capital LLC, Hanover Investments (Luxembourg) SA and Abrams Capital Management LP, don’t revise the offer, it could all be moot.

While lawyers for Catalyst, HBC and Mr. Baker plied their trade at the OSC on Friday, word trickled out that the bid had failed to meet the threshold for success, based on proxies that had already been submitted. The Baker group needed a majority of the minority-held shares to be voted in support.

Even before, the chances of the offer succeeding were slipping away, after influential proxy adviser Institutional Shareholder Services urged investors vote against the bid.

Now comes the soul-searching.

A higher bid could win over support. But the question is, how much higher? Catalyst had proposed offering $11 a share in a plan that the HBC directors rejected, saying it had no chance of being consummated because the Baker group had no intention of selling.

As it stands, the Baker group aims to fund the bid with $976-million in cash from proceeds of the recent sale of HBC’s European operations, plus $200-million in new debt. Raising the offer would necessitate seeking more financing, presumably in debt markets, which will heap more pressure on the balance sheet.

It’s risky, but more for Mr. Baker and HBC than the minority shareholders.

There’s widespread agreement that the failure of the bid would essentially release a trap door on the share price. Before the Baker group announced its privatization intentions in early June, HBC had fallen to $6.37 on the Toronto Stock Exchange, a 42-per-cent drop from a year earlier.

The slide was despite asset sales and equity injections, and tracked poor financial performance at HBC’s Hudson’s Bay and Saks Fifth Avenue chains. Its most recent quarterly report showed the company has not stemmed the flow of red ink, so there would be precious little preventing a return to the basement for the shares.

This certainly would make the OSC result a Pyrrhic victory for Catalyst, which had bought much of its stake for $10.11 a share.

For Mr. Baker and HBC, though, the current options are not attractive. Now, it’s a question of which one is less unattractive.

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