HBC mulls US$3.5B offer for EU business

RETAIL Unsolicited bid for Galeria Kaufhof

TORON TO • Despite an unsolicited offer worth a reported US$ 3.5 billion for its European department store business, it’s not clear that Hudson’s Bay Co. will jump at the chance to offload the Galeria Kaufhof brand or halt an expansion of its flagship stores into Europe.

Toronto- based HBC confirmed that it received “an incomplete, non-binding and unsolicited offer with no evidence of financing” on Wednesday for Kaufhof and other real estate assets from rival Signa Holding GmbH, Austria’s largest privately owned real estate company.

“Our European business is an important element of the company’s strategy,” the owner of Saks, Lord & Taylor and Hudson’s Bay said in a statement, adding that its board intends to review Signa’s offer. It did not disclose the amount.

“HBC remains focused on executing its strategy and plans for the upcoming holiday season.”

Earlier, Reuters had reported the offer of 3 billion euros was fully financed, citing sources close to the deal. Hudson’s Bay stock jumped 10 per cent on the news.

HBC has been expanding its European retail business even as the broader environment has grown bearish on department stores, opening the first of 20 Hudson’s Bay stores in the Netherlands in September and five Saks Off Fifth stores in Germany.

While HBC executive chairman and acting CEO Richard Baker might be keen to divest assets where the company can continue to maintain a retail presence, it’s not as clear that he would sell the entire European business to a rival real estate investor. Regardless, it would appear to be an opportune time for Signa to take another run at Kaufhof, which it tried to buy in 2015 but was outbid by HBC’s offer of 2.5 billion euros, including debt.

Since then, performance in HBC’s European division has been weak amid a rapidly shifting environment for department stores. The company has been under pressure from activist investor Jonathan Litt since June to divest some of its real estate, and the European business in particular. In the fiscal year ending Jan. 8, 2017, same- store sales at HBC Europe fell 1.2 per cent, after rising a tepid 1.7 per cent a year earlier.

In addition, HBC appears to be more willing than ever to extricate itself from its underproductive floor space: last week the retail giant agreed to sell its flagship Lord & Taylor building in New York to WeWork Cos. as part of a joint venture deal to cut debt and its cash by $1.6 billion. The deal will see floors of key HBC’s department stores in New York, Toronto, Vancouver and Germany converted into WeWork’s shared office workspaces.

On Monday, a joint venture between Hudson’s Bay Co. and RioCan Real Estate Investment Trust said it is in talks with CBRE and Brookfield Financial Real Estate Group to explore a sale of its downtown Vancouver property. As it did with its Toronto flagship store in a sale- leaseback to Cadillac Fairview in 2014, HBC would keep its department store open in the event of a deal.

“This wouldn’t be the first time that HBC divested an asset that hasn’t been performing overly well — selling Zellers to Target would be one example,” said Craig Patterson, director of applied research at the University of Alberta’s School of Retailing.

“Despite saying that they are committed to their European operations, I don’ t know how committed they are even to their Canadian flagships right now,” Patterson added, citing the WeWork deal. “It seems like real estate in this environment is worth more than the retail that is taking place within it.”

Bruce Winder, partner in Toronto- based Retail Advisors Network, concurred. “If they have a clear offer on the table, they should take it,” he said.

“HBC is a really great real estate company, but when it comes to mid- tier department stores like Lord & Taylor and Kaufhof, they are an OK retailer in a declining segment.

“Kaufhof has not done much for them materially in terms of generating synergies or producing ( samestore) sales growth. Assuming the investor is legitimate and the German government would approve that deal from a competitive standpoint, it would be a smart move for HBC.”

Signa’s founder, 40- yearold Austrian real estate magnate René Benko, is not without controversy.

In 2012, Benko was convicted of corruption charges and was given a one- year conditional sentence in a decision later upheld by Austria’s supreme court. The bribery case involved Benko’s attempt to influence tax proceedings in Italy by offering money to former Croatian prime minister Ivo Sanader.

According to the Reuters report, Signa values Kaufhof ’s real estate at 2.63 billion euros and has offered to assume all of Kaufhof’s liabilities, including a 1.34-billion euro real estate loan. Hudson’s Bay had no further comment on the offer Wednesday.

Litt, whose Land & Buildings Investment Management owns 4.3 per cent of HBC’s shares and has repeatedly noted that HBC’s real estate value is worth three times’ its share price, is very bullish on Signa’s reported offer of three billion euros. Hudson’s Bay bought Kaufhof in 2015 for 2.5 billion euros.

“Selling properties at or above the company’s stated net asset value is likely the optimal and lowest cost option for raising capital and further underscores the real estate value of the company,” Litt said in a statement Wednesday.

Hudson’ s Bay shares closed up $1.02 to $12.29 on Wednesday, gaining 9.05 per cent. The shares have lost 26 per cent of their value over the last year.