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opinion

One of Richard Baker’s best assets in his fight to take Hudson’s Bay Co. private is actually his foil, Newton Glassman, founder of Catalyst Capital. Were it not for Mr. Glassman’s colourful business history, investors might be giving more credence to Catalyst’s complaints about the deal, many of which have substance.

In short, Mr. Baker, the executive chairman of the company, and his allies are executing a squeeze-out of the public shareholders, plotting to grab 100 per cent of the company with nary a penny of their own money. Mostly, they’re planning to use HBC’s own cash for the deal.

And to make the case that all this is fair, Mr. Baker’s group must renounce not only all his past exhortations about the value of the company’s real estate, but also cast aspersions on the current business projections of the company’s management.

That’s because all three of the fairness opinions delivered to the board’s special committee, in their analysis of the future cash flows of HBC, arrived at ranges where the upper bound of the share price was 10 to 33 per cent higher than Mr. Baker’s “best and final offer” – which is the only offer the special committee says it can truly consider, as Mr. Baker’s group refuses to sell their shares.

It’s enough to turn Mr. Glassman into the unlikeliest of shareholder champions. (His own public company, Callidus Capital Corp., turned out to be a disaster: it went public at $14 a share and went private at 75 cents.)

At first blush, Mr. Baker’s group, which already owns 57 per cent of the company, has a compelling message. The stock stumbled to $6.37 per share in early June; most bricks-and-mortar department-store retail is a horror show; $10.30 in cash represents certainty and liquidity.

The cash he’s offering isn’t his own, mind you. It belongs to the company. The buyout deal uses $976-million in cash obtained in October through the sale of HBC Europe. That deal was announced essentially simultaneously with Mr. Baker’s offer in June, which naturally invites speculation that it was less a plan to spiff up the HBC balance sheet (it paid off a $429-million term loan with part of the money) than it was in-house financing for Mr. Baker’s takeover play.

HBC will use essentially all its cash, plus $200-million in new debt, to buy all the remaining shares, then cancel them. That would give Mr. Baker’s group 100 per cent of what’s left. It’s sort of like a leveraged buyout without much leverage.

The Catalyst proposal – which at this stage consists of a letter of suggestion to the HBC board, rather than anything more legally binding – would almost certainly leave HBC in worse long-term shape. The outline Catalyst provided to the public calls for HBC to retain its cash, pay off of a $865-million revolving loan, and inject $200-million of cash in the company.

Netting it all out, Catalyst’s proposal appears to leave HBC’s balance sheet about $1.1-billion worse than Mr. Baker’s deal. There may no longer be public shareholders in HBC if it goes private. Whether HBC can manage its debt burden does matter, however, to those who prefer an iconic Canadian company not fail due to macho financial engineering.

We raise this prospect because Mr. Baker and HBC have backed away from years of claiming there is hidden, unappreciated real-estate value in the HBC portfolio. They say their buildings are best suited not to be condos, but to be department stores after all, and the department-store business is crummy. But crummy enough to make the company worth $10.30 per share?

Revealed for the first time in the circular are profit and cash-flow projections for each of HBC’s retail chains. The Bay is forecast to be more successful than Saks and Saks Off 5th, the off-price chain. In the next five years, the Saks chains are forecast to cost more cash to operate and maintain than they will bring in.

In sum, however, the cash-flow projections were sufficient for all three advisers to the special committee to place a range on HBC shares that, at their high ends, easily exceeded Mr. Baker’s offer. One high estimate was $11.30. Another was $12.25.

And while Mr. Baker’s group says the valuation estimate from TD Securities ranges up to $12.25, that’s because TD used transaction multiples from deals as old as 2006, and acquisition targets as crummy as now-defunct Sears Canada Inc., to arrive at its final number. TD’s cash-flow analysis has an upper bound for the shares at $13.74 – or 33 per cent higher than the Baker bid.

No wonder that in a shareholder presentation released Friday, Mr. Baker’s group undercuts HBC’s own leadership by noting “Management’s projections … are inherently uncertain, may be beyond their control and would exceed existing industry-wide department store trends.” (Boldface emphasis in the original.)

It’s almost as if no one could be expected to own this troubled company were it not for Mr. Baker, who presided over much of the trouble before presenting himself as its saviour. Mr Glassman’s Catalyst has disrupted that narrative, and forced a closer look at the Baker group’s plan. And you don’t have to find the Catalyst offer superior, or even credible, to find Mr. Baker’s offer inferior.