Macy's Opens the Door, Just a Little Bit, to Arkhouse and Brigade
The department store has been negotiating a confidentiality agreement with its suitors that could lead to a higher offer.
Macy's Inc. is closer to opening up to Arkhouse Management and Brigade Capital Management, which want to take the chain private and have been trying to get a closer look at the company's books to potentially sweeten their offer.
Arkhouse and Brigade offered to buy Macy's for $21 a share, or $5.8 billion, in December. But Macy's said the price was too low and that the financing behind the deal was not certain enough to even allow the investors in to conduct due diligence that might help them get more comfortable with a higher price.
The pair of suitors later upped the offer to $24 a share, or $6.6 billion, and were — at first — rebuffed again.
But as the standoff blossomed into a proxy fight that has Arkhouse proposing new directors for Macy's board, there has been some movement behind the scenes.
On Thursday, Arkhouse filed its preliminary proxy statement with regulators, starting its official pitch for why Macy's shareholders should remake the company's board. The filing detailed how the proposed deal came together and revealed the two sides are in negotiations to sign a confidentiality agreement.
The whole process started slowly — but with a belief in the department store's potential.
“Macy's is an iconic American brand that has fallen on hard times in recent years,” Arkhouse said in the filing. “Market forces, including the growing power of online retail and changes in consumer preferences, have in the view of the Arkhouse parties rendered the company's traditional structure and strategy obsolete and ineffective in generating value and the Arkhouse Parties believe that the company has failed to appropriately adapt to those market forces.”
Arkhouse first reached out to Brigade in May and the two started considering the possibility of a Macy's deal the following month.
After mulling through the summer and into the fall, Arkhouse partner Gavriel Kahane made first contact on Nov. 28 and called Jeff Gennette, chairman of Macy's and, at the time, its chief executive officer.
The call went unreturned and he followed up with an email the next day, requesting a meeting and saying Arkhouse had “a significant interest in a high premium acquisition.”
Gennette proposed a call instead.
“When Arkhouse Management sent
Mr. Gennette a Zoom invite, Arkhouse Management was informed by Mr. Gennette's assistant that Mr. Gennette would not be appearing on camera,” the filing said.
That start led to a frosty back and forth, with Macy's reluctant to let the would-be buyers take a closer look at its operations.
But the investors finally got there face-to-face.
Brigade's Matthew Perkal and Philip Shannon had a sit-down meeting with Gennette and the company's new CEO, Tony Spring, on March 5.
The filing said: “Mr. Perkal also provided Messrs. Gennette and Spring with an opportunity to view copies of the commitment letters/proposals from certain equity and debt financing sources secured by Arkhouse Management and Brigade in furtherance of the Acquisition Proposal, which copies were subsequently provided to the company's advisors.”
That seems to have helped jar the situation loose and Macy's told the investors on March 11 that the offer price was “less than compelling,” but that the company was willing to negotiate a confidentiality agreement to let the investors take a closer look at Macy's.
Wall Street approved and sent shares of Macy's up 3.5 percent to $ 21.50 on Thursday.
Neil Saunders, managing director of GlobalData, said: “In our view, Macy's management remain skeptical of the bid and do not particularly like the focus on monetizing the chain's real estate assets. However, since the bid price was raised Macy's needs to act in the interest of shareholders — and that means due consideration must be given to the offer.
“Macy's is right to be skeptical of Arkhouse and Brigade's intentions,” Saunders said. “Given the expertise of the groups and their various statements about Macy's, it is very clear that the heart of their plans involves selling off real estate to generate a return.”
But in an interview on Bloomberg TV earlier this month, Arkhouse's Kahane was more nuanced and said the buyout offer was not a bid for mass store closings, according to a transcript of the interview filed with regulators.
Macy's is already trimming back with plans to close 150 doors and Kahane said he hopes to gain control of the company before any stores goes dark.
“It's really much more of a capital markets rejiggering,” Kahane said, adding that Macy's has an “awesome asset base.”
“Certainly, I'm sure it's the case that there is redevelopment opportunities in this portfolio, probably largely not through demolition and redevelopment, but in out parcels and malls and other interesting development opportunities that I'm sure will be availed to us when we get that diligence,” he said. “But right now, we're not underwriting that at all. Our base case assumption is that all Macy's malls stay open, all Macy's locations stay open and that we enhance the credit worthiness of the tenant inside the store.”
Meanwhile, Macy's nominated Douglas W. Sesler, founder and president of Fair Street Partners, to its board late Thursday. Fair Street is a real estate investment and development firm with expertise in converting real estate to alternative uses. Before starting Fair Street, he was head of real estate for Macy's and led the monetization and development of more than $2 billion of real estate, according to the company. "Doug will bring to our board a unique combination of experience at real estate investment and financial service firms along with an intimate understanding of our company and its real estate assets," Spring said in a statement. The company also announced that Francis S. Blake, who has been on the board since 2015, will not stand for reelection, in accordance with the mandatory retirement age.