The Wall Street Journal reports that two hedge funds, Arkhouse Management and Brigade Capital, have joined forces to bid on a takeover of Macy’sM, the largest U.S. department store chain. The funds are reportedly offering $5.8 billion.
The Big ‘Why’ Here
Why is this happening? Why would two hedge funds buy Macy’s? And if they’re right that it’s an opportunity, why aren’t other retailers bidding on Macy’s?
The department store business is in decline. Other formats that are more focused, including online retailing, have gained in recent years and younger consumers have not maintained their parents’ shopping habits. Department stores are thought of as too broad, too scattered, less relevant and less interesting.
When a public company is acquired, it’s almost always because buyers believe there’s more opportunity in the business than the public markets recognize. Buyers buy because they think the business will perform better than most investors expect. So they buy it, hopefully it outperforms and then they sell it or go public again at a much higher value.
That’s a challenging argument to make about Macy’s. The trend in the business long-term is down because consumers are turned on to other retail formats.
For an investor to believe there’s a good buy here, they are most likely not going to just buy it and hold it as it is. They are likely contemplating radical change in the business or structure to change the trajectory of the business.
It’s impossible for outsiders to know what kinds of changes the investors are thinking about. But what we’ve seen over time is selling off pieces that Macy’s owns, like Bloomingdale’s and beauty retailer Blue Mercury, or breaking the online and in-store businesses into separate companies is the kind of radical change that investors think about.
But the other way to improve value for the investors is to find hidden assets and sell them off. That would give an immediate return to investors or even allow them to get the retail business for a net price of little or nothing or sell it for a handsome profit.
That could make sense for the investors but it doesn’t always work out for the betterment of the retail business. You only have to look at Sears to find a big retailer with valuable real estate where an investor bought the company and focused on the real estate while the retail business withered and died in the process.
Selling off retail real estate is not as straightforward as it used to be. When department store spaces became vacant in the past, they were desirable spots for other competitors. Now, not so much. It’s not a simple matter to say what the existing owned spaces are worth because alternative uses are not simple to identify.
Other retailers are not likely to bid. The department store format is among the least attractive right now because no big ideas to save or resurrect it have emerged from existing retail thinking. Other department stores are creating improvements making thousands of small changes in strategy and technology to maintain or improve their business. There’s no magic formula for someone to bring into Macy’s to make it exciting again.
With the likelihood that the investors want to make radical change, it seems reasonable that management will resist the initial offer. If management succeeds in fending them off, other financial bidders may emerge or the process will end.
Even if management were to fight off a takeover, the current bid is probably not the last word. The premium being offered is not huge by takeover standards and there’s a good chance the investors will raise their offer if they have the opportunity.
If management fails or the investors raise the price to make it very attractive for shareholders to sell, the investors will take over. If that happens, most likely Macy’s will not remain the retailer you remember. It will probably undergo significant change in one form or another so the investors can increase profitability and make back their money.
That could include many types of changes including those we’ve never seen in the department store business; we’ll have to wait and see. Department stores are evolving, many have gone out of business and there will be more change to come. If this transaction succeeds, that change process will significantly accelerate.
