The Canadians are coming! Or rather, they’re coming back as a Canadian entity is moving to swoop up an iconic U.S. department store chain, reminiscent in some ways of a deal from the late 1980s.
Back then, the Canadian real estate entrepreneur Robert Campeau pushed aggressively into this market, acquiring Federated Department Stores, the parent of Macy’s and Bloomingdales. Within only a few years, Campeau’s embryonic U.S. retail empire was bankrupt, after his hostile takeover bid for Allied Department Store left Campeau with far too much debt on the books to service.
“It took the special genius of Robert Campeau … to figure out how to bankrupt more than 250 profitable department stores,” sniffed The New York Times in a comment on the debacle.
Flash forward a quarter-century, and we all have front-row seats on a second attempt by a Canadian player to acquire a U.S. retail empire. Saks Fifth Avenue (NYSE: SKS) announced Monday that it agreed to be bought by Canadian retailer Hudson’s Bay for $2.4 billion in an all-cash deal.
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This time is different, though. First of all, Hudson’s Bay Co. is the modern day heir to the business first founded in 1680 as a fur-trading business chartered by Charles II of England. (In contrast, Robert Campeau was a high-school dropout who began his working life as a general laborer before turning to building townhouses in an Ottawa suburb.)
The Bay, as it’s commonly known in Canada, is a solidly middle of the road department store, akin to Macy’s, and has been through its own turmoil in recent years. The chain has gone through series in changes of ownership that led to its acquisition by a U.S. private equity group, NRDC Equity Partners, which already owned the Lord & Taylor chain. Last year, Richard Baker, the U.S. real estate investor who had become the company’s “governor” (to use the 17th century parlance), decided to take the company public once more, giving Canadian investors a chance to buy into the national retailer.
That move came amidst a shakeup in both the Bay and Canada’s retailing landscape. Target (NYSE: TGT) and Nordstrom (NYSE: JWN) are planning to expand north of the border and to eat away at the Bay’s traditional dominance of the department store landscape. Walmart (NYSE: WMT) is already up there, as is another high-end retail chain, Holt Renfrew & Co.
It makes sense that the Bay, challenged on its home turf and already having a presence in the U.S. retailing world with its Lord & Taylor stores, would want to push back by boosting its presence south of the border. Sales per square foot at the Bay were only C$133 in 2011, its IPO filings showed, and the company’s goal is to boost that to between C$170 and C$180 per square foot by 2016. Its same-store sales already are growing at a healthy pace: First quarter same-store sales rose 7.6 percent in Canada, although the Lord & Taylor division reported a decline of 1.4 percent, putting some downward pressure on the overall figure.
So, the Bay is clearly no Bob Campeau. But that doesn’t mean that the proposed purchase of Saks is home free, or that investors should excitedly begin snapping up stock in Hudson’s Bay (which is traded on Toronto’s stock exchange under the ticker HBC).
Fitch Ratings pointed to one of the risk factors: The agreement includes a 40-day period in which Saks can solicit a higher price from a rival bidder. The most logical candidate might be Neiman Marcus, now owned by two giant buyout firms, TPG Capital and Warburg Pincus. Neiman Marcus, now in the process of offering shares to the public via an IPO, seems to be out of the running, though. Back in May, the luxury retailer turned thumbs-down on a proposal that would have seen a third big buyout shop, KKR, invest in Saks and then combine the two entities.
Meanwhile, bankers at Goldman Sachs have been quietly exploring options on behalf of Saks, which had promised its investors that this will be a “transformational” year, one in which the company would succeed in boosting not only sales but margins. It appears to be delivering on that pledge, even if not in the way it was originally intended.
Before the Hudson’s Bay deal was announced, value-oriented investors were already turning up their noses at Saks, arguing that their share price reflected too much optimism and too much speculation about a potential deal. And certainly, the Bay seems willing to pay a premium, offering $16 a share while Saks stock until recently had been trading closer to $14.
Saks’s shares haven’t spent much at those levels since early 2008, aside from a few speculative spikes since the rumored Neiman Marcus deal fell apart. Still, the prospect of a bidding war over Saks raises the shade of Campeau and the debacle that followed the tussle for control of Allied back in the late 1980s. Fitch’s analysts hit the nail on the head: There is a risk that the winner of any fight to acquire Saks could end up overpaying and encumbering the company with too much debt.
It’s clear that there is yet another shakeup underway in the retail industry. Same-store sales have been remarkably resilient, growing at a significantly faster clip than the U.S. or Canadian economies, even as consumers have displayed a clear preference for value-priced merchandise that has put a damper on profit margins in some areas. But if the risks for the Bay lie in the retailing business – where uncertainty over the economy remains an issue – the biggest potential rewards lie in the real estate holdings it will end up with as a result of the transaction.
With that real estate, Baker hopes to establish a real estate investment trust, units of which can be sold to help pay down debt. Nor is Baker trying to fly solo. The Ontario Teachers Pension Plan – not known for being foolish investors – have committed to invest $500 million in the transaction, with a Toronto-based investment firm contributing another $250 million.
This does indeed seem likely to be a transformational year, not just for Saks but for department store retailing overall.
