10 reasons why Macy’s real estate make it takeover bait
There is no doubt in my mind that Macy’s is in play as corporate raiders salivate about the real estate dismemberment potential of America’s largest department store operator (746 stores including flagship stores in Manhattan’s Penn Station/ Herald Square, San Francisco’s Union Square, Chicago’s Loop and the city centres of dozens of cities like Minneapolis, Philly, Miami, Seattle, Portland, San Diego, etc). Canada’s Hudson Bay Company, owner of Saks Fifth Avenue (debt, dismember, remortgage flagships) has taken out bank debt for a potential takeover bid.
The Wall Street arbs have begun to accumulate Macy’s, the reason for the recent rise from 28 to 33. But Macy’s traded at 73 two years ago and its ghastly plunge is a symbol of the death of the shopping mall and the department store (remember travel agents? Black-andwhite TV? Bookstores? Brontosaurus?) as the digital revolution/e-commerce guts the centuries old retail business model.
Yet time is a process of death but also a process of birth (twin births in my case). In the death rattle of old Macy’s, the Chicago options markets offer 40 per cent implied vols and the chance to make $145,000 with no cash down. Yet this is only true if Macy’s trades up to 50. My call? It will. Why?
One, Macy’s is off 65 per cent from its 2015 high. This alone is no reason to buy the shares — au contraire. Yet the enterprise value of Macy’s ($9.8 billion stock market value plus $7.4 billion debt minus cash that will swell from the planned sale of 100 stores) is at least $9 billion less than the value of its remonetised property and reinvented ($6 billion on line sales, one-third of total sales in 2016 growing at 18 per cent a year) brick-and-mortar/online shopping retail model. My Ouija board (okay; Excel spreadsheet and bond covenant analysis) tells me that in the Panglossian best-of-all possible worlds, Macy’s could be worth $60. I could be dead wrong. But what if I am right? What then? Macy’s has evolved into the sixthlargest online retailer in the US. As it sells/releases/develops hundreds of stores, its pathetic valuation (10 times earnings) begins to sizzle. As Mickey Rouke whispers to Kim Basinger in the movie that so enthralled me since it was filmed outside my Greenwich Village bachelor pad circa 1992 “I make money with money. Some would call it arbitrage”.
Two, Macy’s has just hired Doug Sesler as its real estate CEO with a mandate to reignite the alchemy of real estate investment banking. Since the new CEO (Terry Lundgren pocketed a $80 million golden parachute for the privilege of bankrupting his shareholders) is a merchandiser (horse and buggy guy?), Sesler will lead Macy’s property spin off renaissance.
Three, the dividend yield on Macy’s is 4.7 per cent. Yummy. Earn while I learn. Wait while Trump makes America great.
Four, Amazon ignited the most revolutionary shift in consumer shopping experience in human history — and US retail was roadkill. But relative valuations on the XRT are at post-Gulf war lows. The US economy is not in recession, as in the 1991 or 2008 lows. Quite the opposite.
Five, management plans to slash the payroll, 10,000 job cuts out of 18,000 employees. At least 100 stores will close. Voila! A honeypot of $600 million a year to be invested in Macy’s online wizards of Oz. Is this the Age of Aquarius? Absolutement!
Six, Macy’s online sales are $6 billion. Apple is $24 billion and Amazon is $92 billion. Yet, fast-forward to 2018; online sales are $10 billion, 50 per cent of total sales. Macy’s is chump change for Amazon.com or Apple even if its shares have doubled to 64. I repeat — chump change.
Seven, Hudson Bay is only just the first corporate raider/asset stripper to target Macy’s. Management will seek a white knight accelerate its online reinvention or spin off its real estate into a REIT, as the Alexanders stores did.
Eight, activist hedge fund Starboard Value estimates $2 billion in real estate. These could be unclocked in a deal, Doug’s mandate. Macy’s owns 400-plus stores and boasts 142 million sqft of retail space. This could be the property deal of 2017.
Nine, Starboard recommends a REIT spinoff to create $10 billion in shareholder value. As a shareholder, so do I.
Ten, the Brookfield development deal is a beauty. Management finally gets it. This is the time to sell its US property portfolio while Mama Yellen hibernates. So do the right things guys! Do it. Do it now.