By Jessica DiNapoli and Harry Brumpton
(Reuters) - The success of Hudson's Bay Co Executive Chairman Richard Baker's $1.3 billion bid to take the department store operator private hinges on whether an independent valuator will view the company more as a retailer and less as a real estate owner, corporate governance experts and analysts said.
Much of Hudson's Bay's value is locked up in its real estate. Were the company to sell off some of its properties to raise cash, it could fetch more than what Baker offered, but would then be forced to pay rent to run some of its stores.
Baker's buyout consortium, which already owns 57% of Hudson's Bay, has made a C$9.45 per share offer for the remainder of the Canadian company, a 48% premium to where the stock was trading before the announcement.
However, some of the minority shareholders, including hedge fund Land & Buildings Investment Management LLC, say they value the company's assets at between C$28 and C$33 per share. Hudson's Bay shares ended trading on Friday at C$9.73, above the C$9.45 offer price, as investors bet on a sweetened bid.
The big valuation gap is due to disagreements over how much of Hudson's Bay's prime real estate can be divested while keeping it operational. Selling off property raises cash but also makes it more financially burdensome for the company to rent the space for the stores it operates. As a result, it would likely close stores, and its retail footprint would begin to shrink.
"There is judgment to be exercised on the valuation, which can always be challenging," said Catherine McCall, the executive director of the Canadian Coalition for Good Governance, an organization representing institutional shareholders in Canadian public companies.
Hudson's Bay operates 39 stores under its Saks Fifth Avenue brand, 133 stores under its Saks OFF 5th brand, more than 40 stores under the Lord + Taylor banner, 90 Hudson's Bay department stores, as well as 37 stores in Canada which the company plans to close this year under the Home Outfitters brand.
Hudson's Bay's trophy asset is the Saks Fifth Avenue building in Manhattan, which this year completed a $250 million renovation.
Hudson's Bay's most recent public estimate for the value of its real estate was in September 2018, when CEO Helena Foulkes pegged it at $28 per share. Baker has offered about a third of that because he argues that the company would have to all but liquidate to achieve all the real estate value.
Toronto-Dominion Bank, which has been hired by a Hudson's Bay board committee to independently evaluate the take-private deal, will recommend whether the company should accept the offer as fair, or reject it and try to negotiate further.