Nearer to being able to block plan to go private

The block disclosed Monday brings Catalyst closer to the threshold needed to block the privatization, but just how much closer remains unknown.

Catalyst and Litt have also reportedly purchased an undisclosed number of HBC shares from the Ontario Teachers’ Pension Plan, which had been poised to sell its 10-per-cent stake to an entity controlled by Baker. Baker and Teachers mutually agreed to terminate that agreement in June, according to a statement from a company controlled by Baker.

A Toronto-based lawyer who specializes in mergers and acquisitions said Catalyst’s total holding would have to be disclosed within two days of completion of the transaction through a regulatory filing, since Catalyst now owns more than 10 per cent of the company.

Catalyst’s moves have sparked speculation as to whether the firm is engaging in a form of “merger arbitrage” — where the buy-in comes with the intention of extracting a higher price to push through the privatization — or whether it is a longer-term play to realize value from the company’s crown jewel real estate holdings.

In public statements, Catalyst has been conciliatory regarding its stake in HBC, but the private equity firm has suggested it would be in favour of a special dividend paid to shareholders from asset sale proceeds and possibly even a sales process for HBC.

“Catalyst is committed to working with the Special Committee and the HBC Board to seek out every alternative that can maximize value for all shareholders, whether through a sale process, dividend distributions of the cash to be realized from the sale of the Company’s key European assets or otherwise,” the firm said in a news release Monday.

Litt’s group has been more forceful, calling for Baker’s removal from the board over the privatization proposal, which he derided as “dead on arrival.”

In a news release Aug. 8, Litt’s group said the planned sale of European assets, expected to close in the coming months, would bring in around $8 a share, “almost equal to the $9.45 (privatization) proposal alone without any value being realized from the company’s other vast real estate holdings and retail businesses.”

Litt, like Catalyst, has stressed the value of HBC’s real estate — a fleet of stores located in historic buildings in the coveted downtown shopping districts across North America.

But unlocking that value could mean drastic changes for the retailer, said Fred Waks, CEO at Trinity Development Group Inc., previously president of RioCan REIT. The problem for HBC is that each of its prime real estate assets is far less attractive when a department store is the main tenant.

“The real estate is only as good as the cash flow coming out of it,” Waks said. “The whole sector is in flux and so it would be very hard to maximize the values with the existing stores in place.”

Financial Post