Macy’s Inc. Wants More Than Hudson’s Bay Co. Can Afford. Now What?

Hudson’s Bay Co. (TSX:HBC) can’t afford what Macy’s Inc. (NYSE:M) wants, so is Hudson’s Bay still a buy?

| More on:

Last month, we revealed that Hudson’s Bay Co. (TSX:HBC) was considering acquiring Macy’s Inc. (NYSE:M), a company more than five times its size. We realized this deal wasn’t so much about expanding its retail operations, but rather it was a play at acquiring Macy’s lucrative portfolio of real estate.

According to Starboard Value, an activist investor, the real value for Macy’s is in the projected US$21 billion in real estate it holds. This doesn’t take into consideration the enterprise value, which, at the time Starboard Value made its proposal, was US$35 per share. And if we look at how Hudson’s Bay has operated previously, it’s clear that this was the real goal.

It all starts with the company that acquired HBC back in July 2008: NRDC Equity Partners. This is a retail and real estate investment firm which had already owned the Lord & Taylor brand. Through this acquisition, it became a serious retail powerhouse. But then things got even more intense when NRDC Equity Partners paid US$2.9 billion, through Hudson’s Bay, to acquire Saks, Inc. in 2013, the holding corporation of the Saks Fifth Avenue flagship store, plus the OFF 5th brands.

Originally, investors thought the company had paid far too much for it, but in November 2014, Hudson’s Bay proved them all wrong by taking out a mortgage against the flagship store. The mortgage valued the single location at US$3.7 billion. In the span of about 18 months, the company increased the value of its acquisition by US$800 million. And that wasn’t even taking into consideration the OFF 5th brands.

But here’s the problem that Hudson’s Bay is running into now…

The company is having trouble pulling together the financing to actually make an acquisition. Remember, Hudson’s Bay only has a market cap of $2.17 billion, but it’s trying to buy a company that is far larger than it. This puts it in a difficult position because it doesn’t have that much wiggle room. And Macy’s obviously understands the value of its assets, so it’s likely asking for far more than its current market cap of US$10 billion.

I like the idea of this acquisition, but it seems highly unlikely that it’ll actually go through. Therefore, investors need to determine if they should own this stock. And unfortunately, I remain unconvinced that Hudson’s Bay is a smart buy at this time because its sales continue to decline. In September, the company suggested it would have $15.9 billion in sales. Two months later, that had dropped by a billion. And by the end of 2016, Hudson’s Bay was anticipating $14.4 billion in sales.

We won’t know until next month what the true sales are for the full year, but when a company continues to cut its guidance every couple of months, it doesn’t seem like it’s going to have a particularly strong quarter. So, at this point, I would be sitting on the sidelines. As a real estate play, it is very interesting; however, there are far more lucrative, pure-play real estate stocks to own. I would focus on those.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jacob Donnelly has no position in any stocks mentioned.

More on Investing

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »