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Report on Business Sandpiper Group joins growing opposition to Baker’s HBC privatization bid

Private-equity company Sandpiper Group has joined the list of Hudson’s Bay Co. shareholders opposed to a $1-billion privatization offer, giving added momentum to the deal’s critics.

Vancouver-based Sandpiper, which focuses on property investments, has taken an activist role in a number of public real estate companies. Several HBC shareholders have come out against the $9.45-a-share proposal led by HBC executive chairman Richard Baker, saying it grossly undervalues the retailer’s properties, including Saks Fifth Avenue in Manhattan and its namesake store in downtown Vancouver. However, to realize the value, the assets must be sold and that raises questions about the remaining operations.

A Sandpiper official confirmed the company’s opposition to the bid, but declined to speak about the matter beyond that. Its founder, Samir Manji, has previously said HBC could be worth at least $35 a share if the retailer could redevelop some of its most valuable real estate into properties that include residential.

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The privatization bid was proposed by shareholders representing 57 per cent of the stock. Those shareholders include Mr. Baker himself, private-equity company Rhone Capital LLC and office-sharing company WeWork.

The deal needs the support of the majority of other shareholders in order to succeed. U.S. hedge fund Land & Buildings and Toronto-based fund manager Catalyst Capital Group Inc. recently bought a portion of Ontario Teachers’ Pension Plan’s 10-per-cent stake in HBC, in a move that is expected to build opposition to the bid.

One of the opposing shareholders said he believes a vote would fail. “Based on everything we know, my expectation is a vote on $9.45 per share … would be a resounding no,” said Matthew Rennie, chief financial officer with Vancouver-based Rennie Capital Corp., which owns about 427,000 HBC shares. The proposed deal is “obviously and incontestably grossly inadequate,” he said.

HBC did not immediately respond to a request for comment.

Most of the dissident shareholders have zeroed in on the value of HBC’s real estate holdings. They have said that Mr. Baker’s bid is worth far less than the value of the retailer’s real estate alone. Land & Buildings says the offer should be raised to $18 a share.

HBC operates Hudson’s Bay department stores as well as luxury chain Saks Fifth Avenue. The retail business has suffered, partly due to changing consumer behaviour and intense competition from online retailers such as Amazon.com Inc. and discount stores.

The shares fell to as low as $6.37 on June 7 and have since risen above the bid price on the wager that a better deal is in the works. HBC stock closed at $9.59 a share on Thursday. At their height in 2015, HBC shares sold for more than $28.

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A co-ordinated campaign among minority holders opposed to the proposal has yet to be formed, with the players waiting for the HBC board’s special committee to rule on whether to recommend the bid, said one source familiar with the situation. The source was granted anonymity because he was not authorized to speak publicly.

It is expected that any effort among dissidents to block the proposal would include demands either to hold an auction or find another bidder.

One of the big questions surrounding HBC is whether it should concentrate on retail operations or behave more as a real estate company.

“Will HBC going forward make a greater profit through its evolved business model versus selling pieces off today. That is the question,” said Alex Arifuzzaman, founder of retail real estate adviser InterStratics Consultants Inc.

HBC has sought to raise cash in recent years by selling off assets.

It sold the company’s Lord & Taylor flagship building in Manhattan for $1.1-billion and has put the rest of the chain up for sale. It has struck a deal to exit its German department-store joint venture for $1.5-billion. (That divestment is expected to close in the fall.) The company also tried to sell its prime HBC property in downtown Vancouver for close to $1-billion, but that deal fell apart last year.

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But that has not been enough. The venerable department-store chain has faced growing discontent from investors as its retail operations suffered losses, the stock price withered and it approved a $29.4-million pay package for chief executive officer Helena Foulkes.

The CEO has said she would not rule out any moves that would improve the company’s financial picture. In a recent report, investment bank Cowen Inc. said it was impressed by many of HBC’s initiatives to improve efficiency, especially at Saks, where it was working on keeping high-spending customers.

Cowen analysts said they see Mr. Baker’s bid as “modest,” suggesting the real estate could be worth $5.1-billion, or $21 a share. However, they cautioned that the proposal could be successful due to investor concerns about HBC’s ability to generate free cash flow as well as weakness in the overall traditional retail sector.

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