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Richard Baker, executive chairman of the Hudson's Bay Co. speaks during the annual general meeting at The Exchange Tower in Toronto on Tuesday, June 12, 2018. THE CANADIAN PRESS/ Tijana Martin.Tijana Martin/The Canadian Press

The numbers behind Richard Baker’s sweetened privatization offer for Hudson’s Bay Co. are a testament to the dire state of department-store retail. They also show why an even richer bid from his group of insiders is unlikely.

The buyout bid for Canada’s oldest company is built on sobering math when it comes to how far the value of the actual business of HBC, which includes two of the best-known banners in North America, has fallen. And its real estate, meanwhile, seems to be worth a lot less than previously estimated.

Mr. Baker, HBC’s New York-based executive chairman, lamented that the company’s many divestitures aimed at improving financial health have failed to put a floor under HBC’s stock price as shoppers turn to online alternatives such as Amazon.com Inc., the US$880-billion behemoth that peddles sweat socks, books, yoga pants, car parts, furniture, organic produce and cloud computing.

Group led by Richard Baker raises takeover offer for HBC by $100-million

Most surprising, though, is the appraisal of HBC’s prime real estate that was produced for a special committee of independent board members. The topic has been hotly debated since June, when Mr. Baker launched his bid to take the company private. That appraised value is a fraction of what dissident shareholders have assigned to the properties.

On Monday, HBC’s board accepted Mr. Baker’s cash offer of $10.30 a share, which values the company at nearly $2.6-billion. It is 9 per cent higher than the initial bid. Backing Mr. Baker are struggling office-sharing service WeWork Companies Inc., private equity investor Rhone Capital LLC, the Abu Dhabi government’s investment vehicle and U.S. investment firm Abrams Capital Management LP. Together, they control 57 per cent of the shares.

Investors now await the response from large minority shareholders who had been shouting from the rooftops that the previous offer was far too cheap, specifically because of the real estate. A key factor will be their own assessment of the land on which the Hudson’s Bay and Saks Fifth Avenue stores sit, much of it in downtown locations.

Some contend the real estate value is more than $20 a share, citing commentary last year from chief executive officer Helena Foulkes, who pegged it at $28. That, however, was before some major asset sales.

As part of its study of the initial Baker bid, the special board committee hired real estate firms CBRE and Cushman & Wakefield to assess what HBC’s 79 properties are worth and gauge the redevelopment potential for 59 of them.

The sweetened offer assigns a value of $8.75 a share for the properties. Rest assured that will be controversial as the bidding group seeks support among the minority shareholders, the largest of which is Toronto-based Catalyst Capital Group Inc. with 16 per cent.

That leaves just $1.55 a share for the retail businesses. Since last October, HBC has made several moves aimed at raising cash and refocusing its operations. They include the $1.1-billion sale of its flagship Lord and Taylor building in Manhattan to WeWork, the $1.5-billion sale of European operations, the closing of the Home Outfitters stores and, in August, the sale of Lord and Taylor to Le Tote. This has done nothing to improve the share price, which is down from a high of more than $28.50 in 2015.

Here’s why: HBC is still weighed down by nearly $3.5-billion of debt, and faces an $825-million bill for rent obligations and restructuring costs related to closings and asset sales. This comes as it deals with a department-store environment marked by 4-per-cent annual sales declines over the past five years in the United States. That compares with growth in online retail of 14 per cent a year in 2018 alone.

Weakening store sales are not the insider group’s only problem. Playing in the background are the financial woes of one its own, WeWork. The New York-based company, once valued as high as US$47-billion, was forced to scrap plans for an initial public offering last month when its value was estimated at US$10-billion to US$12-billion. It has since parted ways with its CEO, Adam Neumann, and begun a search for new funding to avoid a cash crunch.

Catalyst Capital and other minority shareholders, including Land & Buildings Investment Management and Sandpiper Group, will undoubtedly criticize the sweetened offer as being only slightly less inadequate than before.

But given the struggles at HBC and all that’s surrounding the offer, it’s tough to imagine Mr. Baker and his allies upping the ante a second time.