The investment firms that lobbed in a $5.8 billion acquisition offer for Macy's Inc (M.N) are unlikely to clinch a deal but may be successful in getting the U.S. department store operator to unlock more value, investment bankers and analysts say.
Macy's shares rose 19.4% to $20.77 on Monday on news that Arkhouse Management and Brigade Capital offered $21 per share in cash for the parent of the Macy's, Bloomingdale's and Bluemercury stores.
Macy's, which has not commented on the offer, is unlikely to ink a deal anywhere near that price, given that its shares were trading at $25 in February and the bid undervalues the New York-based company on most valuation metrics, analysts and bankers say. It values Macy's at 7.2 times price-to-earnings, below its 10-year average of 9.1 times.
Like other legacy department stores, Macy's has struggled to compete against younger, online competitors who have much smaller brick-and-mortar footprints.
Yet the investment firms spotlighted how undervalued Macy's is relative to its real estate, which is projected by analysts to be worth between $7.5 billion to $11.6 billion. This, the analysts and bankers say, could spur Macy's to consider more property divestitures or entertain a higher bid.
"Macy's is still a valuable partner for many apparel, accessories, home, and beauty brands. Accounting for any real estate divestitures, the buyers have an opportunity to buy a struggling but still profitable business for a very low price," Morningstar analyst David Swartz said.
A Macy's spokesperson declined to comment.
While Macy's rents or leases many of its locations, it owned 316 of its 722 total stores as of the end of January, according to its most recent annual report.
JPMorgan analysts peg the value of the real estate portfolio at around $8.5 billion, with Macy's flagship Herald Square property alone worth about $3 billion. Macy's currently has a market value of $5.7 billion and debt of $3.16 billion.
A source close to Arkhouse and Brigade said they could raise their bid if Macy's agrees to open its books to them. The firms declined to comment.
It is not the first time Macy's has come under investor pressure to cash out on its real estate. It rejected calls from activist hedge fund Starboard Value to sell more properties in 2015, arguing that switching from landlord to tenant was another form of debt. Macy's also rebuffed calls from activist hedge fund Jana Partners two years ago to spin off its e-commerce operations.
The retailer is in the middle of a leadership transition, with Tony Spring, who runs Bloomingdale's, set to replace Jeff Gennette as chief executive of the entire company in February.
Macy's has been pointing to initiatives that have contributed to its shares almost doubling in the last three months, including adopting private brands, pivoting to smaller stores, growing its digital marketplace and building up Bloomingdale's as a luxury brand.
Yet the company has room to downsize its portfolio of properties further as it grows its online business, and the offer from Arkhouse and Brigade will increase pressure on it to do so, bankers and analysts said.
TD Cowen analysts wrote in a note this week that cashing out on properties is a lengthy process.
"It's currently unclear how many stores may have deed restrictions, which could prohibit development of the property. Transforming and monetizing the real estate assets could be very time intensive given the variability within the portfolio and unique agreements at most locations," the TD Cowen analysts wrote.
LESSONS FROM SEARS
Investment bankers point to the case of Sears as a cautionary tale. The department store operator's owner Edward Lampert sold more than 200 Sears stores in 2015 to a real estate investment trust, which it then leased the stores back from. The financial strain of paying rent contributed to Sears filing for bankruptcy in 2018.
It is possible that the acquisition offer will prompt other bidders to surface. This is what happened when Arkhouse led a $2.4 billion bid two years ago for real estate investment trust Columbia Property Trust. While its bid got rejected, Pimco subsequently acquired Columbia Property for $3.9 billion.
Bankers said, however, that Macy's could struggle to attract a strong offer at a time when high interest rates and commercial property woes are making acquisition financing for retailers challenging.
Peers Nordstrom Inc (JWN.N) and Kohl's Corp (KSS.N) both tried to go private in the last five years but could not clinch deals that they believed their shareholders would approve.
