Macy’s Pursuit of Better Deals Amidst Lowball Bids The investment firm that made a $5.8 billion takeover bid for Macy’s (M.N.) is unlikely to close, but it succeeded in unlocking more value for the U.S. department store operator, investment bankers and analysts say. There is a possibility that it will.

Macy’s shares rose 19.4% on Monday after news that Arkhouse Management and Brigade Capital offered $21 a share in cash for the parent company of Macy’s, Bloomingdale’s and Bluemercury stores. It rose to $20.77. Analysts and bankers said Macy’s has not commented on the offer, but its stock traded at $25 in February and the offer was for a New York-based company. Considering that, it is unlikely that the company will trade near that price. . Macy’s is valued at a price-to-earnings ratio of 7.2 times, below its 10-year average of 9.1 times.

Macy’s Pursuit of Better Deals Amidst Lowball Bids Like other established department stores, Macy’s has struggled to compete with younger online competitors that have much smaller brick-and-mortar footprints. But the investment firm revealed how Macy’s is undervalued compared to the company’s real estate, which analysts estimate is worth between $7.5 billion and $11.6 billion. Analysts and bankers said Macy’s could consider selling more properties or offer a higher offer.

“Macy’s continues to be a valued partner for many apparel, accessories, home goods, and beauty brands,” said Morningstar analyst David Swartz. “There is an opportunity to buy a company that is growing in value at a very low price.”

A Macy’s spokesperson declined to comment.

Although Macy’s rents or leases many of its stores, the company owned 316 of its 722 stores at the end of January, according to its most recent annual report.

JPMorgan analysts estimate the real estate portfolio is worth about $8.5 billion, with Macy’s flagship property, Herald Square, alone worth about $3 billion. Macy’s current market capitalization is $5.7 billion and debt is $3.16 billion.
People close to Arkhouse and Brigade said Macy’s could increase its offer if it agrees to make the book public. Both companies declined to comment.

Macy's Pursuit of Better Deals Amidst Lowball Bids
NEW YORK, NEW YORK – DECEMBER 11: A Macy’s store is seen at Herald Square on December 11, 2023 in New York City. Macy’s stock rose more than 17% during morning trading after reports from the Wall Street Journal that Arkhouse Management, a real-estate focused investing firm, and Brigade Capital Management, a global asset manager, have offered to buy the retail chain for $5.8 billion. (Photo by Michael M. Santiago/Getty Images)

This isn’t the first time Macy’s has faced pressure from investors to sell real estate. They rejected a request from activist hedge fund Starboard Value in 2015 to sell more properties on the grounds that switching from landlord to tenant is also a form of debt. Two years ago, Macy’s also rejected a request from activist hedge fund Jana Partners to separate its e-commerce business.

The company is in the midst of a leadership change, with Tony Spring, who runs Bloomingdale’s, replacing Jeff Gennett as company-wide CEO in February.

Macy’s launches private labels, shifts to smaller stores, expands digital market and builds Bloomingdale’s as a luxury brand, initiatives that have helped nearly double its stock price in the past three months are listed.

Still, the company has room to further reduce its real estate portfolio as its online business expands, and the proposals from Ark House and Brigade will increase pressure on the company to do so, bankers and analysts said. Stated.

Analysts at TD Cowen said in a note this week that converting real estate into cash is a long process.

“It is currently unclear how many businesses have restrictions in place that may prevent development on their sites. TD Cowen analysts wrote that “converting and monetizing real estate assets can be very time-consuming given the volatility within the portfolio and the unique arrangements in most locations.”

Lessons from Sears

Investment bankers point to the Sears scandal as a lesson. Department store owner Edward Lampert sold more than 200 Sears stores to a real estate investment trust in 2015, which then leased them back. Sears filed for bankruptcy in 2018 due to the financial burden of paying rent.

It Takeover offer may result in additional bidders. This happened two years ago when Ark House led a $2.4 billion bid for real estate investment trust Columbia Property Trust. That offer was rejected, but Pimco subsequently acquired Columbia Properties for $3.9 billion. But bankers said it could be difficult for Macy’s to get a strong offer at a time when high interest rates and struggling commercial real estate make it difficult for retailers to finance acquisitions.

Peers Nordstrom (JWN.N) and Coles Corp. (KSS.N) both tried to go private in the past five years but were unable to strike deals they believed shareholders would approve.