Posted on

A deal for the Bay is finally close, but is the retailer even worth saving?


The Financial Post takes a look at 11 people and companies we’ll be watching closely in the new year.

It is 4 p.m., precisely a week before Christmas at a Hudson’s Bay store at the corner of Yonge and Bloor in downtown Toronto. The area is one of the city’s biggest shopping destinations during the busiest season of the year. But the Bay is dreary.

Most of the fluorescent lights are burnt out in the men’s fragrances department. A level up, in women’s wear, the mannequins outnumber the humans. Dozens more lights are out, others are flickering and one is buzzing, while the ceiling panels are stained black by either dust or smoke, it’s difficult to tell.

The carpet, too, has curious stains. A splotch beside a rack of Adrianna Papell dresses looks like a lady dancing. And the renovation work on the hotel next door groans through the floor, thudding, thrashing, scratching.

This is the Bay on the edge of the so-called Mink Mile, a magnet for the city’s fanciest shoppers. This is also a little piece of what two warring factions of investors, bankers and Bay Street lawyers have been fighting for months to control.

Late Friday, Hudson’s Bay Co.’s chairman Richard Baker and his group of shareholders announced they were raising their bid for the department store chain by $75 million, to $11 a share or $1.18 billion in total. That increase was enough for the takeover bid’s loudest opponent and HBC’s largest minority shareholder, Catalyst Capital Group Inc., which pledged to support the deal when it’s put to a vote.

The Bay store at Yonge and Bloor streets in Toronto.

The Bay store at Yonge and Bloor streets in Toronto.

Peter J. Thompson/National Post files

And with that, the takeover battle for Canada’s oldest company — older than the country by 197 years — appears close to a conclusion, but amid all the talk around the fate of the historic Canadian retailer, a nagging question remains: Is the Bay actually worth saving?

Industry observers say it would take some combination of closing certain stores, shrinking others and making drastic improvements to the in-store experience — meaning improved service, cleaner stores and a better mix of brands — to make the Bay relevant again.

But even then, it might be too late.

“Do I think in its current state it can survive? No,” said Fred Waks, a former president of RioCan REIT who has spent decades developing shopping centres.

If you want to know why the Bay, unchanged, will die, Waks invites you to walk into one of the stores and look around.

“You look at the floors and you look at the ceilings and you look at the fixtures,” he said. “To find somebody to help you is extremely rare.”

Do I think in its current state it can survive? No

Fred Waks, a former president of RioCan REIT

Up till now, HBC has been frank about its survival prospects if shareholders reject Baker’s offer. Left on the public market, the argument goes, HBC would struggle to find support for the expensive, time-consuming work of overhauling the business, repurposing real estate and improving its e-commerce efforts.

Since Baker first announced the takeover bid this summer, Catalyst has been the main shareholder standing in his way. Arguing that Baker was undervaluing the company, Catalyst launched a competing bid of its own.

Baker and Catalyst then traded barbs in a seemingly endless stream of press releases until, last month, Catalyst succeeded in delaying a vote on the bid altogether by complaining to the Ontario Securities Commission.

HBC Chairman Richard Baker in 2015.

HBC Chairman Richard Baker in 2015.

Peter J. Thompson/National Post files

Baker’s new offer rescues what looked like a doomed deal since Catalyst, with a 17-per-cent stake, boasted enough allies to derail the old bid in a shareholder vote, which required support from a majority of minority shareholders.

For months, Baker’s group refused to budge, insisting $10.30 was their “best and final offer” and declining to entertain outside bids. But Friday’s revised bid — the third in a series of Baker group offers, starting at $9.45 in June — matched what Catalyst was itself willing to pay for HBC.

At $11 per share, Catalyst’s 32.3 million shares are worth $22.6 million more than they were at $10.30 per share. With Catalyst now onside, Baker’s group of shareholders — a handful of international investors, including the Emirate of Abu Dhabi and Boston-based Abrams Capital Management LP — have surpassed a major hurdle.

A special committee of HBC’s board of directors have endorsed Baker’s offer as the best, most plausible way forward. But there are still some barriers to the deal. In light of the new offer, the committee is seeking an updated valuation and fairness opinion on the company. HBC is allowed to terminate Baker’s $11-per-share deal if it’s below the new fairness opinion’s formal valuation range. The deal also needs to pass a shareholder vote.


A customer holds a shopping bag inside the Hudson’s Bay Co. flagship store in Toronto.

Cole Burston/Bloomberg files

But HBC’s challenges do not end if and when the deal closes.

“The retail environment is deteriorating,” special committee chair David Leith told shareholders in a November letter.

In the year and a half since Helena Foulkes took over as chief executive, HBC has rid itself of underperforming assets so it can focus on its core businesses — the Bay and Saks Fifth Avenue — while closing Home Outfitters and selling off Lord and Taylor, as well as the Gilt e-commerce business and HBC’s European operations.

But still, it wasn’t enough to stop HBC’s stock from tanking, Leith said in December. Over five years, the price fell about 64 per cent, to around $6 in June, before Baker’s take-private bid was announced. In a call with investors in December, Foulkes acknowledged the Bay’s biggest issues: hard-to-find staff and hard-to-navigate stores.

“We’re fixing the fundamentals of the store environment,” she said.

Foulkes is also in the middle of cutting down the Bay’s mix of brands, culling 600 older, more conservative ones, and replacing them with 75 designer labels. For those new brands, the Bay is focusing on getting them from places such as South Korea and Scandinavia, instead of the traditional fashion markets of London, Paris and Milan.

But fixing the business will take cutting more than brands, said Kathleen Wong, a retail analyst at Veritas Investment Research.

“It’s tough,” she said last month. “There are way too many stores.”

The Hudson's Bay flagship store in Toronto.

The Hudson’s Bay flagship store in Toronto.

Cole Burston/Bloomberg files

For years, Wong said, HBC seemed intent on expanding, adding new banners and pushing into new markets while its flagship brand, the Bay, floundered. The Bay currently has 89 department stores across Canada, but reducing that footprint is complicated.

“When you look at it, it’s a bit late now,” she said. “If HBC wants to get out now, who’s going to buy the real estate?”

One major problem is that the properties were built for department stores and, lately, department stores have not been strong tenants. In more suburban areas, the Bay tends to be an anchor tenant in shopping malls, and locked into hefty long-term leases. Again, it’s tough to move a footprint of that size.

“It’s not like you can just whip out a pad of paper and decide you’re going to move out of some of these locations,” said Michael LeBlanc, a former executive at HBC in the early 2000s who now runs M.E. LeBlanc & Co., a retail consultancy. “They’re decades-long leases and who’s gonna buy them?”

The other issue with maintaining such a vast cluster of sprawling department stores is that it takes a lot of money to run. You need the staff and the budget to, say, replace each light bulb when it goes out. If you don’t, the whole brand reputation suffers.

Signage inside a Hudson's Bay store in Toronto.

Signage inside a Hudson’s Bay store in Toronto.

Cole Burston/Bloomberg files

“If you’ve got a big fleet like that, and you want them all to maintain the brand standard, it takes a lot of investment,” LeBlanc said. “Maybe you don’t need them to be as big as they are.”

But shrinking stores causes a similar problem: “Who gets the rest?” he asked, pointing out that it takes time and investment to redevelop parts of stores for new tenants.

But regardless of the size, the stores just need to look and operate better, said Waks, the retail real estate developer, who now runs Trinity Development Group Inc.

“If you don’t put the capital in real estate,” he said, “you do not get the productivity.”

The best example of that, Waks said, is the Bay at Yonge and Bloor. It’s in a prime shopping location and yet it doesn’t appear to have been upgraded in years.

Why on Earth is anyone going to shop there based on the shopping experience?

Fred Waks

“Why on Earth is anyone going to shop there based on the shopping experience?” he said, also pointing out that a flagging department store is at risk of losing the best brands.

In a neighbourhood such as the Mink Mile, brands have other options. The luxury department store Holt Renfrew is down the street. And major brands such as Chanel and Versace have their own stores in nearby Yorkville.

“They don’t want to downplay their brand,” Waks said. “You have to show them that you’ve got the customer base and the sales and the ability to move their wares.”

If not, the brand pulls out, giving customers one less reason to shop in the store. As fewer customers come, more brands stay away, sending the store spiralling further and further, until it looks something like the Bay on Bloor: dowdy, dirty and empty.

“If you don’t invest,” Waks said, “you lose.”

Financial Post

• Email: [email protected] | Twitter:





Source link

Posted on

Major victory for Catalyst against HBC take-private deal as OSC delays shareholder vote


The Ontario Securities Commission has decided to push back a crucial shareholder vote on the takeover of Hudson’s Bay Co., effectively freezing the transaction until the company releases a more detailed story on how the deal came together.

The decision, announced late Friday evening, marks a major victory for Catalyst Capital Group Inc., the private equity firm that has tried for months to thwart HBC chairman Richard Baker’s quest to take Canada’s oldest company private.

At the OSC, Catalyst was seeking an order to either block or stall the privatization offer, put forward by Baker and his group of majority shareholders.

After nine hours of closing arguments on Friday, the OSC’s three-person panel dismissed Catalyst’s request to block the deal. But the panel said it will require Hudson’s Bay to amend and reissue its circular, which was originally sent to shareholders last month to inform them about the deal. The weeks-long process of reissuing the circular means HBC has to postpone the upcoming vote at a shareholder meeting scheduled for Tuesday.

During the hearing — crammed into two days, so the OSC could make a decision before Tuesday’s vote — Catalyst complained that HBC didn’t properly inform shareholders about crucial detail. Catalyst paid particular focus to Baker’s involvement in a $1.5 billion deal to sell HBC’s European assets to Signa Holdings, while also contemplating a bid to takeover HBC using the proceeds from the sale.

In their recommendation to the panel, OSC staff said they were concerned with testimony from special committee chair David Leith, who told the OSC that Baker informed the board of directors in late March that he was thinking about buying the company, while the Signa deal was still in flux.

OSC staff said that a special committee should have started monitoring the take-private situation immediately, since Baker had evolved “from someone who had managed the company to someone who wanted to buy the company.”

There was a clear conflict

But the special committee wasn’t formally tasked with supervising the privatization process until June 9, a day before two press releases — one announcing the Signa sale, the other announcing Baker’s take-private bid — were released within minutes of each other.

That information wasn’t in HBC’s circular about the deal last month, and it should have been, OSC staff said in their remarks toward the end of the hearing. HBC released those details in a press release last week, but staff recommended HBC still needed to send out a revised circular to quell confusion.

“(We) invite you to read the circular again knowing what you now know,” OSC lawyer Rikin Morzaria told the panel. “There was a clear conflict that put Mr. Baker’s interests directly in conflict with minority shareholders.”

HBC argued that Baker’s comment to the board about privatization was merely an idea in March, far from the concrete proposal that emerged in June. And HBC did have a special committee throughout the spring, though its mandate was to watch the Signa deal, as well as the sale of HBC’s banner Lord and Taylor.

HBC lawyer Seumas Woods implored the OSC not to make an order in the case, arguing that it would give the wrong impression that the HBC board was “with their hands caught in the cookie jar.”


HBC chairman Richard Baker.

Tijana Martin/The Canadian Press/File

“Somebody merely expresses an interest and you’ve got to go down this (special committee) route? That is not a message you want to send to the markets,” Woods said, before the panel made its decision. “The mere fact that you make an order in this case is sending a message that the special committee did not do their job properly and they require adult supervision.”

Baker group lawyer Eliot Kolers said ordering a revised circular would be “a very dangerous road to go down.”

“Mr. Baker, at no time, acted in a clandestine manner,” Kolers said.

He accused Catalyst of pursuing its own economic interests and interfering in a chance for other minority shareholders to extract cash value from the struggling department store chain.

Baker’s group of majority shareholders is offering $10.30 per share in the deal, which has been approved by the HBC board of director’s special committee in charge of vetting the privatization bid. Catalyst announced a competing bid, for $11 per share, which the special committee dismissed as a non-starter last month after the Baker group declined to sell its 57 per cent stake.

“They’re holding this process hostage,” Kolers said.

The OSC will file a formal order by the middle of next week. After the panel deliberated for 15 minutes, OSC vice-chair Grant Vingoe said the order will outline what disclosures need to be included in the new circular, to be mailed to shareholders. In the interim, HBC agreed to postpone Tuesday’s shareholder meeting.





Source link

Posted on

Hudson’s Bay Co take-private deal to go before OSC hearing


Catalyst Capital Group Inc. achieved a small victory in its campaign to block a takeover of Hudson’s Bay Co. on Wednesday, winning an opportunity to pursue its case in front of the Ontario Securities Commission.

After nearly three hours of arguments, the OSC granted Catalyst standing in the case, deciding it was in the public interest to go ahead with a hearing on Catalyst’s application to stop or delay a $10.30-per-share takeover offer from chairman Richard Baker’s group of shareholders.

In remarks Wednesday, Catalyst cast itself as a deep-pocketed defender of its fellow minority shareholders, railing against what it viewed to be flawed privatization process conducted by a “neutered” special committee of the board of directors.

“For at least six months, the investing public has been kept in the dark,” Catalyst lawyer Adam Chisholm told the OSC’s three-person panel. “Many minority shareholders will not have the sophistication or the resources to bring an application to the commission. I’m thinking about retail investors who own shares of this company.”

Commission vice-chair Grant Vingoe announced his decision in a short statement after the panel deliberated during a 20-minute recess.

The Baker group warned against granting Catalyst standing, arguing it would water down a provision that allows third parties to bring applications before the commission in matters of public interest. Typically, only commission staff bring matters before the commission.

“Staff is the protector of capital markets, not Catalyst,” Baker group lawyer Eliot Kolers told the OSC, pointing to Catalyst’s push to buy up shares after the takeover bid was announced.

“Part of the integrity of the capital markets is not having the commission be used by a self-interested applicant of this nature.”

But commission staff, represented by Charlie Pettypiece, agreed with giving Catalyst standing, arguing that the matter raised “fundamental securities law issues.”

Catalyst, HBC’s largest minority shareholder, has signalled it has enough support to block the deal in a shareholder vote scheduled for Dec. 17. It has also floated its own bid to buy HBC at $11 per share.

On Wednesday, HBC lawyer Seumas Woods questioned the timing of Catalyst’s application, so close to next week’s vote.

“They’ve left it very late in the day,” he said, calling Catalyst’s position “long on rhetoric … short on substance.”

Prominent proxy advisors have also weighed in on the saga, including Glass Lewis & Co., which recommended on Wednesday that shareholders vote in favour the Baker group offer. Institutional Shareholder Services, however, recommended that shareholders vote against the deal in a report on Friday.

Vingoe, the OSC vice-chair, challenged HBC’s criticisms of the last-minute nature of Catalyst’s request for a hearing. HBC complained Catalyst didn’t request a hearing for weeks following HBC’s release of a management circular on the deal. But Vingoe pointed to an HBC news release late on Friday night, which updated HBC’s official account on how the deal came together. The release gave additional information about how the special committee waived a standstill provision to allow shareholder Fabric Luxembourg Holdings S.a.r.l. to join the Baker group’s bid.

By updating its account of the deal, HBC was essentially restating its circular. So while it was released in mid-November, Vingoe said, “it’s only complete very recently.”

The hearing starts on Thursday with Catalyst’s cross-examination of David Leith, chair of the HBC special committee.

• Email: [email protected] | Twitter:





Source link