Catalyst Opposes Baker Offer For HBC
● Richard Baker’s plan to take HBC private, despite board approval, is at risk.
The Catalyst Capital Group Inc. said Thursday that shareholders including itself, representing 28.24 percent of Hudson's Bay Co.'s total common shares outstanding, intend to vote against the bid to take HBC private by Richard A. Baker and other major shareholders representing 57 percent of the shares.
However, sources close to HBC disputed Catalyst's contention and stated that HBC has sufficient support from minority shareholders required to get the privatization deal done. For Baker's bid to go through, approval by a majority of the 43 percent of the shares not owned by Baker and his group is required.
The sources also indicated that one shareholder activist, Land & Buildings Investment Management, has sold all or virtually all of its shares in HBC, raising the chances of Baker's bid to go through. Lands & Buildings has been pressuring HBC to increase shareholder value and
monetize real estate.
Importantly, a special committee of HBC's board last week approved the bid by Baker, governor and executive chairman of HBC, and other key shareholders, to take HBC private for 10.30 Canadian dollars a share.
“Following an independent and thorough evaluation process, the special committee of the HBC board determined that the arrangement under which minority shareholders will receive
$10.30 per share in cash is in the best interests of HBC and fair to the minority shareholders,” said a spokesperson for the special committee on Thursday. “It provides immediate and certain value at a significant market premium. Based on the extensive analysis of independent, internationally recognized financial and real estate experts, the special committee believes this offer accurately reflects the company's expected performance due to the continued investment required at HBC, the deteriorating retail environment and the current market valuation of the company's real estate assets. We urge shareholders to review the forthcoming information circular to be filed in the coming weeks, which will include further details and analysis that informed the special committee's determination, before making any decision.”
A shareholder vote on Baker's privatization bid is expected in mid-December.
Not surprisingly, on Thursday afternoon, Gabriel de Alba, managing director and partner of Catalyst, said, “Since the announcement of the Baker group proposal, we have held a belief that the HBC board and its special committee would ensure that the interests of all shareholders would be the foundation of the process and negotiation with
Richard Baker. The agreement that the company entered into is so fundamentally conflicted, that it shows the amount of leverage Richard Baker has over the board and management. It is unconscionable that the board would use shareholders' funds in a severely undervalued share buyback with massive tax leakage and dress it up as a premium transaction.”
Added de Alba, “With shareholders holding approximately 28.24 percent of the HBC common shares now opposing the insider issuer bid, we call on the board to either demand that Richard Baker release other members of the Baker group to consider other options or allow the Baker agreement to expire and run a true sale process. Catalyst is aware of a number of strategic investors that are interested in participating in a process that is open and not constructed to benefit an insider, and we have no doubt that the HBC board is also aware of these interested parties. Catalyst itself is also prepared to be a participant in the process and work toward an offer to acquire the company at terms financially superior to the insider issuer bid.”
Catalyst said it exercises control or direction over 32,326,878 common shares of HBC, representing approximately 17.49 percent of the 184,331,345 issued and outstanding common shares.
Catalyst, a Canadian private equity investment firm investing in distressed and undervalued companies, in mid-August purchased 18,491,502 shares of HBC at 10.11 Canadian dollars per share in cash. The total cost was approximately 187 million Canadian dollars.
Catalyst has begun to formally review possible steps to oppose Baker's bid, including speaking with certain security holders of the company and other parties to assess support for Catalyst's position and examining possible scenarios to maximize value for all shareholders, including an alternative transaction to Baker's bid.
The 10.30 Canadian dollar price offered by Baker's group represents a premium of about 62 percent to HBC's closing price on the Toronto Stock Exchange on June 7, the last trading prior to the announcement of the shareholder group's initial offer, and a premium of 52 percent to the
20-day average closing price on that date. However, Catalyst, considering it recently paid 10.11 Canadian dollars per share for a significant stake, would expect HBC to offer significantly more than 10.30.
The shareholder group representing 57 percent of the company's shares also includes Rhône Capital, WeWork Property Advisors, Hanover Investments and Abrams Capital Management.
Baker's group determined that taking the company private was best for the retailer for several reasons, citing:
• Retail industry headwinds keeping the stock price down.
• HBC needs more capital to be competitive and possibly redevelop properties, though it believes redevelopment would “not result in creating additional value for shareholders in the foreseeable future compared to the certain value provided by the transaction.”
• HBC needs money to pay restructuring costs at stores being closed or sold off in North America and Europe, and also to pay rents at some of its retail locations.
Last week, the company said, “The cash premium transaction provides minority shareholders with immediate and certain value that is expected to be higher than that realizable in the foreseeable future. Continued industry headwinds and the deterioration in operating performance have negatively affected the company's financial results. Despite the execution of several strategic initiatives, the company's share price has continued to decline. The department store and specialty retail competitive landscape continues to evolve rapidly and the company will be required to invest substantial capital and resources to remain relevant to its customers and successfully compete.”
The special committee retained TD Securities Inc. to come up with a value for the common shares. TD Securities determined that as of Oct. 20, the fair market value of the common shares of HBC ranged between $10 and $12.25 a common share.