Hudson’s Bay Co. executive chairman Richard Baker has submitted a $1.3 billion bid to take the department store operator private. Baker’s buyout consortium, which already owns 57% of Hudson’s Bay, has made a $9.45 per share offer for the remainder of the Canadian company, which was a 48 % premium to the price at which the stock was trading before the announcement.

However, some of the minority shareholders, including hedge fund Land & Buildings Investment Management LLC, say they value the company’s assets at between $28 and $33 per share. Hudson’s Bay shares ended trading on Friday June 21 at $9.73, above the $9.45 offer price, as investors bet on a sweetened bid.

Corporate governance experts and analysts are saying that the bid hinges on whether an independent valuator will view the company more as a retailer and less as a real estate owner.

Hudson’s Bay operates 39 stores under its Saks Fifth Avenue brand, 133 stores under its Saks OFF 5th brand, more than 40 stores under the Lord + Taylor banner, 90 Hudson’s Bay department stores, as well as 37 stores in Canada which the company 

plans to close this year under the Home Outfitters brand. Hudson’s Bay’s trophy asset is the Saks Fifth Avenue building in Manhattan, which this year completed a US$250 million renovation.

The big valuation gap is due to disagreements over how much of Hudson’s Bay’s prime real estate can be divested while keeping it operational. Selling off property raises cash but also makes it more financially burdensome for the company to rent the space for the stores it operates. As a result, it would likely close stores, and its retail footprint would begin to shrink.

TD Bank has been hired by a Hudson’s Bay board committee to independently evaluate the take-private deal, will recommend whether the company should accept the offer as fair, or reject it and try to negotiate further. The board committee excludes representatives of Baker’s buyout consortium and is granted power to prevent any deal, even if the prospective acquirers otherwise control the company. 

The methodology TD Bank uses to value the bid for Hudson’s Bay will be key to the outcome and will be scrutinized heavily by shareholders. The bank will likely be assessing how comparable companies’ shares trade, research similar deals and consider how much a financial buyer like a private equity firm would pay, said Andrey Golubov, a professor of finance at the University of Toronto.

Even if TD Bank blesses an offer from Baker’s consortium and the board committee negotiating a deal approves it, the acquisition still faces some hurdles. A majority of the shareholders who are not affiliated with the buyout consortium have to vote for it; they account for about 21.5% of the company’s shareholder base. Opponents could still challenge the deal in court when the company seeks approval for it before a judge under the Canada Business Corporations Act.

Source: Financial Post