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Takeover 101: What’s Up With Hudson’s Bay (TSX:HBC)?

Chen Liu
question marks written reminders tickets
question marks written reminders tickets

Hudson’s Bay (TSX:HBC) operates department stores in Canada and the United States under the Hudson’s Bay, Saks Fifth Avenue and Saks Fifth Avenue OFF 5TH banners. It recently sold its equity interest in its European sectors and is liquidating its Hudson’s Bay Netherlands stores.

The company also divested of its interest in the Lord + Taylor banner this year following the divesting of Gilt Groupe Holdings Inc. during the second quarter of fiscal 2018.

Intrinsic price

Based on my calculations using a discounted cash flow (DCF) valuation model, I determined that Hudson’s Bay has an intrinsic value of $9.95 per share. Assuming less than average industry growth, the intrinsic value would be $4.50 per share and higher than average industry growth would result in an intrinsic value of $21.80 per share.

At the current share price of $8.65, I believe Hudson’s Bay is slightly undervalued. My valuation model doesn’t take into consideration the value of Hudson’s Bay real estate reported to be worth $8.75 per share (valued at $35.24 per share in 2017).

Hudson’s Bay has an enterprise value of $5.2 billion, representing the theoretical price a buyer would pay for all of Hudson’s Bay’s outstanding shares plus its debt. One of the concerning things about Hudson’s Bay is its high leverage with debt at 64.9% of total capital versus equity at 35.1% of total capital.

The takeover

Through his group, Hudson’s Bay Chairman Richard Baker owns 57 percent of the outstanding Hudson’s Bay shares. Baker and his group are offering $10.30 a share, representing a material premium to the current share price.

Recently, private equity firm Catalyst Capital Group Inc (“Catalyst”) made a counteroffer for $11 per share, which was rejected by the Baker-led board. Catalyst owns a 17.5 percent stake in Hudson’s Bay.

The current share price is $8.65 at writing, indicating that shareholders are concerned about the potential failure of both takeover bids. Indeed, Catalyst has made it very clear that it would not support Baker’s offer — and Baker’s group has made it clear that it won’t support Catalyst’s offer.

My primary concern is with the valuation of Hudson’s Bay properties. The Saks Fifth Avenue store in Manhattan was reportedly valued at $4.8 billion in 2014, but appraised at $2.1 billion in November, 2019.

The report cites declining New York rent, worse-than-expected performance over the last five years and the unstable retail sector as reasons for the decreased value.

In September 2018, then CEO Helena Foulkes pegged the value of Hudson’s Bay real estate at $28 per share. I find it surprising (and a bit hard to believe) that the value has declined 69% (to $8.65 per share) in a span of 14 months even with Hudson’s Bay divestitures.

Foolish takeaway

Investors looking to buy shares of a retail company should avoid Hudson’s Bay. There is too much uncertainty as to where the company is headed, and I believe shareholders will bear witness to a very long legal battle regarding the takeover.

My primary concern with the takeover is the value of Hudson’s Bay real estate, which has decreased 69% in value over a span of 14 months. That said, Hudson’s Bay has divested of its European division and Lord + Taylor, which partly contributes to the decline in real estate value.

In conclusion, I believe that shareholders looking to buy and hold for the long term should steer clear of Hudson’s Bay.

More reading

Fool contributor Chen Liu has no position in any of the stocks mentioned.

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