Richard Baker is doubling down on his attempt to revive big-name department stores with a $2.4 billion bid to buy Saks Inc, bringing the iconic New York retailer under the same roof as Lord & Taylor and Canada's Hudson's Bay.
Baker's Hudson's Bay Co is offering $16 per share to buy the retailer, a 30 percent premium over levels in May, right before media reports that Saks was up for sale. The deal is worth $2.9 billion in cash, including the assumption of Saks' debt.
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The deal will bring Saks to Canada, with up to seven stores, either newly built, or replacing some Hudson's Bay stores, plus maybe two dozen Off Fifth outlet stores. It is the latest change in the Canadian retail environment that is awaiting the opening of the first Canadian Nordstrom Inc store in 2014.
Shares of Saks rose 3.5 percent to $15.85. HBC shares rose 6.3 percent as markets focused on the new company's enhanced ability to compete with Nordstrom, and on the possibility that the expanded company could spin off its real estate into a trust.
After U.S. department store chain Dillard's Inc announced plans in 2011 to form a REIT, its shares soared.
"We will investigate it and work on it at expeditiously as we can," Baker, Hudson's Bay's chief executive, said of the idea of a real estate investment trust. The expanded company would have a portfolio diversified enough for a spin-off of this type, he said in a conference call with analysts.
Saks, famous for its iconic Fifth Avenue flagship store in Manhattan, will operate separately within HBC and have its own merchandising, marketing and operations teams.
Saks' flagship, opened in 1924, generates about $600 million in sales a year and the building itself is worth $1 billion.
"The Fifth Avenue store is a gem and everything else is second to that," said independent retail analyst Walter Loeb. "Many of the stores are not as productive."
The deal is the latest by Baker, a New York real estate mogul, who with his father Robert is part of a group that owns National Realty & Development Corp, a private developer of U.S. retail and shopping centers.
The two led a group that in 2006 bought Lord & Taylor via NRDC Equity Partners, and two years later, the firm bought Hudson's Bay, North America's oldest corporation, which has roots going back to the 17th-century Canadian fur trade.
In a 2011 deal hailed as a masterstroke, Baker oversaw the sale of 220 leases from HBC's Zellers store to Target Corp, giving the discount retailer locations for its Canadian expansion and yielding HBC $1.8 billion.
"I wouldn't bet against Richard Baker. He seems to have a magic touch when it comes to real estate," said Barry Schwartz, portfolio manager at Baskin Financial Services in Toronto.
HBC and Lord & Taylor were put under the HBC umbrella in early 2012 ahead of HBC's November initial public offering.
But the stock has mostly traded below its IPO price, as investors remain skeptical about the prospects for the company amid a tough competitive environment. The company reported a larger-than-expected loss during the first quarter.
The latest deal will create a North American retail operation with annual sales of $7.2 billion based on last year's sales. This compares to $12.1 billion for Nordstrom and $27.7 billion for Macy's Inc, who also owns luxury chain Bloomingdale's.
HBC expects C$100 million ($97.3 million) a year in savings through consolidating information technology systems and more efficient clearance for the existing chains.
Saks in recent years has closed department stores in markets like Portland, Oregon, and Dallas, but pushed its Saks Off Fifth outlet chain. Saks same-store sales rose only 3.2 percent last year, lagging Nordstrom and Neiman Marcus Group.
It has 41 full-service stores and 67 outlets. In Canada it will compete with retailers like the high-end Holt Renfrew chain as well as Nordstrom.
Saks' two largest shareholders are Mexican billionaire Carlos Slim and Italian luxury businessman Diego Della Valle, who own a combined 30.5 percent of the stock.
HBC will finance the deal with about $1 billion in new equity, $1.9 billion in senior secured loans and $400 million of senior unsecured notes, as well as cash on hand.
There is a 40-day "go-shop" period when Saks can seek better bids following the auction, but it said it did not expect to get any. It anticipates the deal will close by year-end.
Saks sales collapsed in late 2008 as the recession hit, forcing the retailer to slash prices and margins, and training shoppers to expect discounts. It took three years for the retailer to start selling at closer to full price.
And the retailer has struggled to keep pace with rivals Nordstrom and Neiman Marcus Group Inc, which each get a much bigger proportion of sales online than it does.
Bank of America Merrill Lynch was HBC's lead financial adviser, with RBC Capital Markets providing additional services. Stikeman Elliott LLP and Willkie Farr & Gallagher LLP were the Canadian retailer's legal counsel.
On Saks' side, Goldman Sachs, Morgan Stanley and Guggenheim Securities were financial advisers and Wachtell, Lipton, Rosen & Katz provided legal counsel.
(Reporting by Phil Wahba in New York; Additional reporting by Dhanya Skariachan.; Editing by Lisa Von Ahn and Janet Guttsman)