HBC.TO - Hudson's Bay

[Contra123]

Is there a thread on Hudson's Bay? 

I don't want to get SHLDed, but I thought the situation is potentially interesting.  Be forewarned: it's a SOTP story (ouch).

Stock is currently around CAD 9. Below is an excerpt from their latest investor presentation (Apr 2017) where management tried to argue that a good starting point for a discussion on the 'real' value is around CAD 35 per share.

http://ibb.co/keezwn

 

Here's what changed in the past 12 months:

- the stock price is close to the lows since the 2012 re-listing.

- the operating business' consolidated cash burn got worse

- lots of stuff going on in the market.  Neiman Marcus is getting closer and closer to Ch11; Nordstrom tried to get sold and failed; Starboard got out of Macy's, but Macy's stock has since recovered some ground; GGP got "taken under" by BAM at a 5% cap

- general US sales of luxury brand houses (LVMH; Richemont) remain robust

- the Lord & Taylor flagship was sold for a premium to the value on that page. That deal was accompanied by a US$500m cash infusion that increases the fully diluted share count to at least 234 million shares (the new shares are preferred convertible).

- there's an activist with a 5% stake that is exerting pressure for the board to curtail any expansion spend and focus on selling or redeveloping the real estate. That activist has reached a standstill at least until the AGM but may re-engage. 

 

You can play around with the assumptions in the excerpt, e.g. dinging the cap rates and the NOI; you can even assume that the combined value of the aspects not captured in that table (i.e. the retail opco / stores rented from 3rd parties) is negative. But IMO the valuation is interesting.

 

Some further notes

- how much of HBC's real estate is owned? I saw estimates ranging anywhere from 30% to 50-60% of GLA.

- the activist and the usual long pitches think the key here is the Saks flagship 611 5th Ave location in midtown Manhattan. The air rights were sold so the asset can't be redeveloped too drastically, though. But the location is very, very prime, and the 5th Ave market is reasonably hot (4-5% cap rates) AFAIK

- potentially a quicker way to get some valuation credit from the markets is for HBC's management to list the JVs, but I don't know how easy it would be from a tax & structuring POV and what cap rate the market would demand for essentially a single-tenant REIT

[valueinvestor]

Buyout offer @ 9.45.

 

Guess I've learned my lesson with majority holders. Bought at $16, doubled down at $8 and been underwater for more than two years.

 

 

[Mephistopheles]

Anyone know what is the total amount of owned real estate here? It's a Canadian co so I can't figure it out from the annual report. I want to figure out what sort of price they got on purely real estate basis as I own Macy's.

[valueinvestor]

Anyone know what is the total amount of owned real estate here? It's a Canadian co so I can't figure it out from the annual report. I want to figure out what sort of price they got on purely real estate basis as I own Macy's.

 

Last I checked it was $30 CAD per share. I’ll post if I have the spreadsheet still saved.

[Mephistopheles]

Anyone know what is the total amount of owned real estate here? It's a Canadian co so I can't figure it out from the annual report. I want to figure out what sort of price they got on purely real estate basis as I own Macy's.

 

Last I checked it was $30 CAD per share. I’ll post if I have the spreadsheet still saved.

 

Thanks that would be great. Does it include # of square feet and breakdown of trophy properties?

[valueinvestor]

Anyone know what is the total amount of owned real estate here? It's a Canadian co so I can't figure it out from the annual report. I want to figure out what sort of price they got on purely real estate basis as I own Macy's.

 

Last I checked it was $30 CAD per share. I’ll post if I have the spreadsheet still saved.

 

Thanks that would be great. Does it include # of square feet and breakdown of trophy properties?

 

Sorry it did include both but for some reason could not find it anymore. However, on their investor relations, they provide a breakdown of the properties and square footage in their investor presentations.

[peterHK]

Don't touch it; mgmt is awful.

 

They claim RE is worth $30/share, but they're taking it private at $9.45 (and the buyout group controls 57% of the vote, so there's no stopping them). Clearly something doesn't add up here.

 

They've claimed it's worth $30 since the stock was $16, yet here we are at $9. Says a lot about management's capital allocation ability that they haven't at any time in those intervening years, spun out the real estate or really got serious about monetizing it, or tried to wind down the retail operations to stop the ridiculous cash burn they have going. 

[Mephistopheles]

Well 57% owned but don’t the 43% get to vote among themselves ?

[peterHK]

Well 57% owned but don’t the 43% get to vote among themselves ?

 

They only need half of the 43%. So maybe it doesn't go ahead, but I mean lets say it doesn't: the existing mgmt. team already has control and has got HBC to where it is today. Maybe you get a higher offer, but they're not going to give you $30, I doubt they'll give $20, or $15; maybe you get $12. Downside is it goes right back to $6. Not a great trade.

[valueinvestor]

Well 57% owned but don’t the 43% get to vote among themselves ?

 

They only need half of the 43%. So maybe it doesn't go ahead, but I mean lets say it doesn't: the existing mgmt. team already has control and has got HBC to where it is today. Maybe you get a higher offer, but they're not going to give you $30, I doubt they'll give $20, or $15; maybe you get $12. Downside is it goes right back to $6. Not a great trade.

 

Looks like it will be $15, Catalyst bought 18M shares at 10.11 each. Unless, they are averaging down, and hoping to increase the price overall.

[writser]

Interesting situation. Never looked at it for some reason. Always hard in Canada to figure out who owns shares. According to this article Litt had a 4.3% stake which would have been around 8m shares at the time? Did he buy/sell anything since? Looks like he still is involved. Then there is the Ontario teachers pension plan stake, 18m shares. And finally the Catalyst stake, 18.5m shares they just bought plus what they already had. I'm not sure if the pension plan tendered (some of) their shares.

 

Shares outstanding are ~184m + 55m from the preferreds for about 239m shares. The buyers control 57%. That leaves ~102m shares for the minority vote, i.e. it can be blocked with 51m shares. Best case: Catalyst just bought ~18.5m shares, they already owned a few million shares, Litt has ~8m shares and the Ontario pension plan has 18m shares. That's already basically a lock to vote down the deal. Worst case the Ontario pension plan sold a majority of their shares in the tender offer and I am double counting. Even in that case it's hard to see how see how dissenters have <25m shares. Still a major risk for the buyer group.

 

The chances of the current deal getting voted down seem high to me. The hard part is figuring out how the buyer group will react. Common sense suggests to me that the buyers currently want to spend ~C$1b to buy out minority shareholders. Adding ~C$200m to that seems like pocket change in relation to the size of the balance sheet, debt, operating leases, etc. However, there's also the question of whether the dissenters will agree with such a small price boost. If the owners want to shell out another C$500m seems more questionable to me.

 

And finally current prices already imply a decent chance of a higher offer - especially if you take into account the time value of this being a protracted battle. Seems interesting but I am not quite convinced yet. Just my first thoughts. Did I miss anything?

[kab60]

Didnt Ontario Pension Plan sell 10 pct to buyout group in January? Per the offer.

 

[writser]

Didnt Ontario Pension Plan sell 10 pct to buyout group in January? Per the offer.

 

AFAIK that agreement was cancelled a few days after the bid was announced: https://toronto.citynews.ca/2019/06/18/teachers-drops-sale-of-its-stake-in-hudsons-bay-to-hbc-executive-chairman/ . Also see the press release filed on SEDAR on June, 18. Bit sneaky that they didn't post that one on their own website here ..

[valueinvestor]

Didnt Ontario Pension Plan sell 10 pct to buyout group in January? Per the offer.

 

AFAIK that agreement was cancelled a few days after the bid was announced: https://toronto.citynews.ca/2019/06/18/teachers-drops-sale-of-its-stake-in-hudsons-bay-to-hbc-executive-chairman/ . Also see the press release filed on SEDAR on June, 18. Bit sneaky that they didn't post that one on their own website here ..

 

At the end of the day, I think this is a different arbitrage. I was in this name for a long time and it is a 5% position for myself. Although management was very opportunistic at the expense of their minority shareholders, they were very conservative in valuing the real estate. Each time, they sold or refinanced, the value of the real estate was at a premium to their valuation. A lot of their real estate are irreplaceable assets, which provides a very good cushion, and considering we have activists with skin in the game, it seems like the possibility of a value destruction is very low.

 

Worst case scenario is that the deal falls through, and stock craters, but at the end of the day, I would double down again, as the intrinsic value of the company is still excellent. Even though the retail business is easy to kill, the real estate that they hold is resilient than most.

 

Update:

 

Also keep in mind, they have a lot of good brand under their fold such as Saks, Lord and Taylor and many more. I really do not think the market is correct in ascribing a zero value to them, and FWIW, I don't think Richard Baker was wrong in the direction he took to revitalize the retail business. He did take the right steps, but unfortunately, time and size cannot give them the speed to completely transform the model into what would be competitive today.

[writser]

Haven't been following this closely, but it looks like a definitive agreement has been struck at $10.30, a small price bump: https://www.businesswire.com/news/home/20191021005309/en/Hudson’s-Bay-Company-Agrees-Private-10.30-Share . Whether the vote will pass - I don't know.

[Parsad]

Haven't been following this closely, but it looks like a definitive agreement has been struck at $10.30, a small price bump: https://www.businesswire.com/news/home/20191021005309/en/Hudson’s-Bay-Company-Agrees-Private-10.30-Share . Whether the vote will pass - I don't know.

 

They are getting a steal relative to the real estate.  The retail business is awful, but they should just shut it down to the core and lease out the rest of the real estate...or sell a good chunk.  Cheers!