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HBC's Baker leads $1-billion bid to take retailer private
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Executive chairman's bet to turn around struggling company depends on closing of European sale
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By MARINA STRAUSS
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Tuesday, June 11, 2019 – Print Edition, Page B1


Hudson's Bay Co. executive chairman Richard Baker is leading a $1-billion cash proposal to take the iconic company private, a big bet on the turnaround prospects of the long-struggling retailer.

Toronto-based HBC, which owns its namesake chain and the luxury Saks Fifth Avenue, also has a deal to sell about half of its European operations to its partner overseas for about $1.5-billion. That transaction needs to close before HBC is taken private.

At $9.45 a share, the proposed go-private bid by Mr. Baker and other shareholders, who already own the majority of HBC, represents a premium of 48 per cent to Hudson's Bay's closing share price on Friday of $6.37 a share on the Toronto Stock Exchange.

The company's shares closed on Monday at $9.07, a 42-per-cent jump from Friday but a little below the proposed privatization price, suggesting that shareholders don't necessarily expect a higher offer.

"Like many other retailers, Hudson's Bay Co. continues to face a number of difficult challenges in a fast-changing environment," Mr. Baker wrote in a letter on Monday to David Leith, chairman of a special committee of HBC's board of directors.

"We believe that improving HBC's performance requires significant time and patient long-term capital that is better suited in a private company context without the emphasis on short-term results and returns."

Mr. Baker has taken many risks since he led a group that acquired the troubled HBC in 2008, some of which have worked and some of which have not. Now, he wants to make what could be his biggest bet yet by investing in a moneylosing retailer in a sector that is being shaken up by online competition.

With 57 per cent of shareholders already approving the privatization, another 21.5 per cent would be needed for it to be successful. "Something had to be done at HBC," said Alex Arifuzzaman, founder of retail real estate adviser InterStratics Consultants Inc. "When you look at its earnings in the past few years, it's not going in the right direction. ... The bottom line is: The entire retail industry, especially department stores, is in a complete restructuring phase now."

HBC, which has struggled with weak results, has been divesting underperforming divisions and stores under chief executive officer Helena Foulkes, a U.S. retail veteran who took the top job at HBC in early 2018.

It sold half of its European business, its flagship Lord & Taylor store in New York, and its Gilt.com flash-sale fashion site. It is shutting some of its U.S. Lord & Taylor and Saks Off 5th outlets and all 37 of its Home Outfitters stores in Canada. Last month, it said it was considering selling its entire U.S.

Lord & Taylor chain.

But the initiatives haven't been enough to stem the flow of red ink in its continuing operations nor the stock price's decline as the company failed to cash in on the value of its real estate.

"Though HBC has long tantalized investors with potentially massive upside in its real estate, it has brought inconsistent execution in an immensely challenging industry," Mark Petrie, retail analyst at CIBC World Markets, said on Monday. "And though there have been encouraging signs under new management, material risks still exist on many fronts."

Mr. Baker led the purchase of the troubled, privately held HBC two years after he and a group of investors acquired Lord & Taylor.

He hired some experienced retail leaders, including Bonnie Brooks, to spearhead a turnaround. And, in one of his standout moves, he oversaw the sale of HBC's Zellers stores to U.S.-based Target Corp.

for more than the price for all of HBC. The Zellers sale paved the way for the U.S. rival's foray into Canada, which turned into a complete retreat. Under Mr. Baker, HBC returned to the public markets in late 2012 at $17 a share.

That's a far cry from its $6.37-ashare closing on Friday and the $9.45-a-share privatization proposal.

Mr. Baker had less success in other areas. The company's acquisition of German-based Galeria Kaufhof in 2015 didn't play out well, and HBC made some missteps in its management of Saks Off 5th. Meanwhile, HBC and other department store chains grappled with intensifying competition from digital forces, including powerhouse Amazon.com Inc.

While HBC slashed costs and staff, the efforts still didn't make enough of a difference amid high turnover in its top ranks.

Under Ms. Foulkes, who has been praised as a skilled retail leader, HBC has been unloading unprofitable properties and focusing on its stronger North American assets, especially Hudson's Bay and Saks. But it has been under pressure from U.S. investor Land & Buildings Investment Management LLC to go further to realize the value of its real estate - and particularly to sell its lucrative Saks Fifth Avenue flagship store in Manhattan. The company has taken some steps to appease investors, but resisted parting with Saks's main store, which is a landmark in New York. (Jonathan Litt, founder of Land & Buildings, which was believed to own about 3 per cent of HBC's shares last fall, could not be reached on Monday.) Patricia Baker, retail analyst at Bank of Nova Scotia, said she expects the privatization to succeed, especially given the controlling group's 57-per-cent ownership.

"Certainly, turning around this type of operation will be easier to do outside the scrutiny of the public markets," she said.

The proposed take-private deal would depend on the closing of the sale of HBC's half-interest in its European real estate joint venture and 49.99-per-cent stake in its European retail joint venture to SIGNA, HBC overseas partner.

The proposal represents a premium of 39 per cent to HBC's 20-day average closing price, the company said. It said the purchase price is equal to the amount the Ontario Teachers' Pension Plan Board accepted for the sale of its block of about 10 per cent of HBC's shares in January. The stock has dropped significantly since.

Along with Mr. Baker, HBC's majority shareholders are Rhône Capital LLC, WeWork Property Advisors, Hanover Investments (Luxembourg) SA and Abrams Capital Management LP. Officesharing firm WeWork acquired the flagship store of Lord & Taylor from Hudson's Bay this year and plans to operate above the Hudson's Bay flagship store in downtown Toronto.

Burt Flickinger, managing director of consultancy Strategic Resource Group in New York, said HBC's planned sale of its stake in the European division will give the retailer capital to help repair the damage that's been done to the company. He envisions HBC eventually could buy debt-ridden Neiman Marcus in a move to consolidate the luxury market in North America and beyond.

HUDSON'S BAY (HBC) CLOSE: $9.07, UP $2.70

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HBC is majority owned by a group including executive chairman Richard Baker, Rhône Capital LLC, WeWork Property Advisors, Hanover Investments (Luxembourg) SA and Abrams Capital Management LP.

MICHAEL FALCO/THE GLOBE AND MAIL

Hudson's Bay Co. would need another 21.5 per cent of shareholders on top of the current 57 per cent to approve privatization for the move to be successful, analysts suggest.

FRED LUM/THE GLOBE AND MAIL


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