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Over the course of two days in August, long-time Hudson’s Bay Co. director David Leith met with the retailer’s largest shareholders to hear their plans for turning around the struggling 350-year-old company. A few of them were radical.

Some HBC institutional shareholders proposed liquidating the 300-store chain, shutting down the stores and selling its real estate. Several fund managers suggested exiting the retail business and transforming HBC’s landmark stores into office towers and condos. Others wanted a special cash dividend financed from the company’s asset sales.

Mr. Leith, head of the HBC special committee that is dealing with a $1.1-billion buyout offer from HBC executive chairman Richard Baker, heard everyone out. And ultimately, faced with management’s projections that the business was going to be a huge cash drain in the coming years, he concluded that the offer from Mr. Baker’s group is as good as it gets.

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“Unfortunately, we would have loved someone to have a magic bullet, but there isn’t a magic bullet here," Mr. Leith said in an interview Wednesday. “We’ve seen the challenges that are affecting, particularly, department store retail and the destruction that’s going on, so our considered view is that on balance, this is the right transaction.”

Mr. Leith’s remarks Wednesday were his first public comments on the transaction. He made them, he said, to add the special committee’s voice to the dialogue around the HBC deal, as one large shareholder disputes that this is indeed the right transaction.

Toronto private equity fund Catalyst Capital Group Inc. bought a large block of HBC shares after the Baker group announced its bid in June, and continued building its position. It then floated an $11-per-share takeover proposal, above the $10.30 the special committee ultimately accepted from the Baker group. On Monday, the HBC special committee rejected the Catalyst overture.

The reason, Mr. Leith said, is that this is not an auction: Mr. Baker’s group said from the beginning it will not sell its shares, which represent 57 per cent of the company. That “was the gating issue that couldn’t be satisfied. And Catalyst knew that was a gating issue when they bought the stock, they came in after the announcement.

“It’s gotten a bit lost that HBC was not put up for sale," he said. “This wasn’t a circumstance where the company was selling a division and some insiders wanted to buy it and then some others came along at a higher price and the insiders were protected. That isn’t this at all.”

For some, a large part of the buy thesis for HBC stock was the underlying value of its real estate, and for a while, the company was able to excite investors with sales of its store properties for hundreds of millions of dollars. Through 2017, investor presentations using 2014 data showed an appraisal of the New York flagship store of its Saks chain that valued the property at US$3.7-billion.

Now, however, as part of a comprehensive assessment of its properties by CBRE and Cushman & Wakefield, the company says the new valuation ranges from US$1.6-billion to as low as US$250-million.

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But Mr. Leith said the Saks building in midtown Manhattan is emblematic of the challenges of transforming legacy department store properties, often vast and windowless, into condos or offices, as some HBC investors suggested.

And if its best use is retail, the woes of that retail industry will drive the valuation. "The Saks building is ultimately a building that works for a large-scale luxury retailer, and it’s to be priced towards what a large scale luxury retailer can afford to pay. And that’s quite a bit different than what would have been the case five years ago.”

Analyst Patricia Baker (no relation to Richard Baker) at Bank of Nova Scotia said in an interview Wednesday the Baker group’s privatization offer is the best path forward for HBC minority shareholders.

“Markets have proven that Hudson’s Bay stock price reflects the company’s operating performance, which is currently problematic. The potential for real estate development was never reflected in public markets, and given the scale of the challenges facing the company, HBC is far better off being private.”

HBC share price will drop to between $6 and $8 if the privatization is turned down by investors, Ms. Baker predicted. She said HBC chief executive Helena Foulkes has a credible turnaround plan for the stores, but it will take several years to roll out, and public market investors are in no mood to be patient with department store stocks.

Mr. Leith said that if shareholders turn the Baker group deal down, "we’re just going to have to continue to say to people, ‘This is what we see. This is what we’re doing and we’re trying to create value – but it may be quite a long road.’ Which is ultimately why we came to the conclusion that, with everything facing the company, this is an offer we recommend people take.”

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With reports from Rachelle Younglai and Jeffrey Jones

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